Owners and Salary of S Corp

[sshibby]

My wife and I are purchasing a gym in a few months.

I think I want to open it under an S corp for tax purposes.

If the business is set up with me as the only owner would I be able to pay my wife a small salary and not pay myself, and avoid self-employment tax?

Or should we both be owners since either way we'll have to pay self-employment tax on our salary?

[Freelancier]

There's really no "self-employment tax". Basically, if you're an employer, the employer pays half the employee's social security and half their medicare taxes, the employee pays the other half. As a self-employed person, you pay both halves (since you're bother employer and employee). The tax amount is the same either way.

On the other hand, being an S corp owned by you and paying salaries to you as owner and your wife as an employee, you qualify for buying company-based health insurance, which costs about the same as individual plans, but often comes with a larger health network. You can also set up SEP-IRAs for putting away up to 25% of salaries into a retirement plan. Talk to your accountant about other benefits, but we've had this in place for the past 10 years and it works great.

[turboguy]

This is something you should talk to your accountant about but I have an S Corp and my accountant tells me that as 100% owner I must be the highest paid employee. If he is correct on that then you being the owner, paying your wife but not paying yourself might cause problems. I am not sure of the reason but I think it may have to do with being able to take distributions which I have often not done for long periods but do occasionally.

[tallen]

You can certainly put your wife on the payroll if you want, but if you work in the business as an owner of an S-corp, then you are supposed to pay yourself a "reasonable" wage or salary (via payroll) before you take any distributions of profit.

[sshibby]

I was under the impression that I only have to pay myself a reasonable salary for work that I actually do. If I don't work there I don't need a salary.

Although I will be the only regular employee I was thinking I could pay her instead of myself ,as if she was the one working there full time, to lower our tax expense on that salary.

[Freelancier]

You're not going to lower your tax expense by paying her a salary. The only way to reduce the tax expense is to pay you -- the shareholder -- a "reasonable" salary and then take the rest as periodic dividend distributions. The dividends do not have payroll taxes (i.e., social security and medicare taxes), but they do have Federal/State taxes.

[sshibby]

My next question would be on paying myself. I assume I can do that without using a payroll service or software and just writing my a check or scheduling a weekly/biweekly transfer? How would I make sure I'm paying the right amount of taxes on that salary?

[tallen]

My next question would be on paying myself. I assume I can do that without using a payroll service or software and just writing my a check or scheduling a weekly/biweekly transfer? How would I make sure I'm paying the right amount of taxes on that salary?

By using a payroll service...

But you can do it all yourself if you really want -- you should read IRS Publication 15, 15-a, and 15-b, and become familiar with IRS forms 941, 940, W-2, and W-3, and the equivalents for your state.

You will also want to make sure to look into your state's expectations around worker's compensation insurance -- likely you can apply for a waiver.

[Freelancier]

Yes, you can do it all yourself without software, but it's a royal pain the butt. Lots of forms, deposits that need to be made to the IRS and state, lots to keep up with.

I recommend a service like Intuit Online Payroll or similar. Reasonable monthly price to get them to file all the forms and pay the right amounts to the government entities.