16 Nov Profit First Perspective: Paying Yourself as an S Corp Owner
If you are an S Corp owner/partner, your tax preparer may have had a discussion with you about setting yourself up for a payroll salary/wages paid to you from your business. They may have even discussed the concept of “Reasonable Compensation”. Paying yourself as an S corp owner can be confusing, especially if you follow the Profit First method. The owner/partner of an S Corp gets compensated in 3 ways using the Profit First Methodology: Profit, Owner’s Pay, and Taxes.
As a mastery level Profit First Professional, I like to describe an ideal world. In this world, S Corp owners who follow the Profit First method have a clear and consistent opportunity for successfully satisfying both optimal compensation as a business owner and optimal owners pay. You see, the definition of Owner’s Pay in the Profit First world is in alignment with the IRS’s call for S Corp owners to pay themselves a salary consistent with reasonable compensation. By IRS Standards, an owner must take a “reasonable salary” via payroll wages paid to the owner of the S Corp.
The IRS determines “reasonable salary” using several factors, such as:
- The comparable salary you would pay someone to carry out your roles and responsibilities to the business
- The number of hours you worked in the business
- The amount of money you left in the business for it to grow
- Several other even more complex calculations. Determining reasonable compensation is not a science; it is more of an art form.
In Profit First, we determine Owner’s Pay including the following items a business owner might pay themselves:
- Wages paid to the owner from payroll
- Regular recurring distributions to support the everyday functions of your personal life
- Regular recurring expenses paid for owner’s benefits like health insurance premiums, recurring contributions to retirement plans, etc.
IRS Reasonable Compensation and Profit First Owner’s Pay meet with the calculation of Wages Paid to the Owner/Partner of the S Corp. In an S Corp, the government wants to collect tax payments on payroll throughout the course of the year. They are essentially paying themselves first instead of waiting for your annual tax return. For an S Corp owner running Profit First in their biz, the wages paid to the owner via payroll are the best companion to regular, recurring payments to the owner for everyday expenses.
Distributions that an S Corp owner takes are quite similar to the potential for a Profit Distribution in the world of Profit First. In our practical execution of Profit First, S Corp owners reward themselves for maintaining a profitable business. This comes as a once-per-quarter Profit Distribution. The owner may spend that money personally for extravagant and fun stuff to enhance their lifestyles.
Profit First Professionals are trained to find the intersection of keeping profit IN the business and taking money OUT of the business. Each is necessary, for reinvestment and profit distribution. That profit distribution is a reward for your hard work and accomplishments.
The good life with Profit First
The good life, as I know it, is a universe in which two things collide. The S Corp wages paid to the owner and the tax benefits inherit in Profit First’s Owner’s Pay concepts. Those concepts also set us up for permanent profitability. We can sleep at night knowing we are satisfying the need for both IRS compliance and permanent profitability. It is also that warm and comfy place where the fear of not having enough to pay bills dissipates. We are confident that our basic needs will be met through Owner’s Pay.
I am at my happiest in my warm and comfy “Good Life” place. My hope is that with the support of a Profit First Professional, you too can find your own “Good Life.” In my world, I come to work each day busily efforting toward my own potential juicy profit distribution at the end of the next quarter. If you know me, you know that my Good Life always has a vision of my next vacation dancing through my head. Simultaneously, I get to help my clients do the same. We establish muscle memory that leadsthem to permanent profitability. Then they too get to reap the rewards of a fabulous quarterly profit distribution. Cheers to your own warm and comfy “Good Life” place.
Want guidance on paying yourself as an S corp owner and reaching your “Good Life”? Get in touch, we’d love to assist you!
