Need some advice. Just hit first year in business. Small business owner, I own 49%, partner is 51%. S Corp. On Paper we weren’t profitable through the whole year. Little to no profit. Probably will report a loss. We have all income and expenses tracked. However, we never had any sort of payroll, no W2s, no employees just us. Whenever we paid ourselves it was just drawing money out of our account which we didn’t really pay attention to the total either. As we come to the New Year we had to start thinking about this. What steps do I need to take to ensure I do things properly and move forward correctly when filing?
If you took money out as draws but are unprofitable, you could be setting yourself up for some unintended tax consequences if you take out more than your individual "basis" in the account. This may be an even bigger issue than the reasonable compensation. It likely would make more sense to reclassify your draws as payroll and make the payroll tax payments before the end of the year (or at least before W-2s need to be sent out at the end of Jan). I would suggest working with an accountant on it to make sure you don't put yourself in a tough situation!
I've heard of people doing this. It does require an extra schedule C as well - so while not ideal like you said, it could work. I still think best course of action is to amend your reports if you can and pay the employment taxes - but this is better than nothing!
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Did you pay yourself properly this year? Let me know in the comments below
Need some advice. Just hit first year in business. Small business owner, I own 49%, partner is 51%. S Corp. On Paper we weren’t profitable through the whole year. Little to no profit. Probably will report a loss. We have all income and expenses tracked. However, we never had any sort of payroll, no W2s, no employees just us. Whenever we paid ourselves it was just drawing money out of our account which we didn’t really pay attention to the total either. As we come to the New Year we had to start thinking about this. What steps do I need to take to ensure I do things properly and move forward correctly when filing?
If you took money out as draws but are unprofitable, you could be setting yourself up for some unintended tax consequences if you take out more than your individual "basis" in the account. This may be an even bigger issue than the reasonable compensation. It likely would make more sense to reclassify your draws as payroll and make the payroll tax payments before the end of the year (or at least before W-2s need to be sent out at the end of Jan). I would suggest working with an accountant on it to make sure you don't put yourself in a tough situation!
@ What’s the easiest way to classify my draws as payroll? Can I use square payroll and just look back at every single draw and log it as payroll?
@@JamieTrullIf I reclassify all of my draws as payroll will it generate a W-2 with the yearly total?
Another less than ideal solution is to pay yourself as a 1099 sub. Though incorrect, at least you have met your employment tax obligation.
I've heard of people doing this. It does require an extra schedule C as well - so while not ideal like you said, it could work. I still think best course of action is to amend your reports if you can and pay the employment taxes - but this is better than nothing!