All this week we’re talking about tax planning action steps you need to do before year-end.
There are two biggies that are simply no getting around: paying out your payroll and setting up your pension plans.
If you have an S Corporation or an LLC that has elected to be treated as an S Corporation (LLC-S) and you have income, you absolutely MUST draw a salary this year. That means payroll, just as you’d write a payroll check for anyone else who works for you.
If you have income in your S Corporation or LLC-S and do not take a salary, you’re just asking for an IRS audit. In fact, that’s one of the top items on their red flag hit list.
How much salary should you take? Well, the IRS tells us that it has to be a reasonable amount. What would you pay someone else to do what you do? But you get to then temper that with the profitability of the company. For example, if you’d have to pay someone $50,000 per year to do what you do but your start-up company only made $20,000, you don’t need to pay yourself the full $50,000. But you should take some kind of a salary.
The other thing to consider is the amount of pension contribution that you want to make. If you’re the only employee, you might have a Solo 401(k) and want to take the full pension contribution amount of $49,000. To get that, you’re going to have to also take a salary of $130,000 in the year.
For the payroll, you can’t just accrue the payroll if you’re an owner/officer of the company. You need to actually issue a payroll check and take social security, medicare, federal and state income tax withholding. These need to be paid in a timely fashion to the IRS. You’ll also need to file quarterly reports and issue a Form W-2 to yourself.
You also need to establish most business pension plans prior to year-end. You don’t necessarily have to fund them. Generally, you have until the filing date of the business return to fund, but you do have to get the plans set up and established first.