S Corp Tax StrategiesS corp tax strategies after a year of owner draws

A common example

This owner is made up. The shop brought in money all year. Every Friday, cash moved to a personal account, and the transfer memo said distribution. Nobody set up payroll, so no Form 941 went in and there's no W-2.

At year end the company still files its return, and the owner's personal return still includes what the company reports. If the owner worked in the shop, part of that money was really pay for the work. The fix is to get that pay onto payroll.

Fixing it while the year is still open

1. Choose a payroll provider.
2. Write down what you do each week, and set a salary that fits that work.
3. Start payroll. If the year is close to over, a catch-up paycheck before December 31 can bring the salary for the year up to a reasonable level.
4. Keep wages in their own account, apart from the Friday transfers.
5. Close the month so the bank, the receipts and the unpaid bills match.

Then the company return has payroll reports and closed months behind it.

An example of a catch-up salary

Say it's October. Profit is on pace for $100,000, and a fair salary for your work this year is $50,000. Payroll starts in October at $5,000 a month, so October through December pays $15,000. A catch-up paycheck of $35,000 in December brings the year to $50,000 on your W-2. The payroll provider withholds tax on each paycheck and makes the deposits.

These numbers are made up, and a fair salary for your work may be higher or lower. On the call, we set the salary and the schedule with your real numbers.

Looking at the months that already passed

For a year that already closed, we look at the facts with you. The path may be an amended return, late-election relief under the procedure in the Form 2553 instructions, or starting clean with a salary from this year forward. Each one leaves a clear paper trail. We help you pick the one that fits.

Payroll is reported when the pay actually happens, so the salary starts from today. For the earlier months, we pick the right path with you.

Two owners, and only one works there

If two people own the shop and only one works in it, the salary goes to the owner who works. Profit after that salary comes out to both owners in line with what each one owns. Each owner gets a K-1.

When both owners work, each gets a salary that fits the work that person does. One person may work more weeks than the other, and the salaries can differ.

If this is you

Plenty of owners find out about the salary rule after a year of draws. It's common, and it's fixable. The first step is to tell us, on the form or on the call, that payroll never started.

If that's your situation, this page is for you. Bring the year, and we'll work through it together.

Questions about a year of owner draws

Can I turn last year's draws into salary now? Payroll is reported when the pay happens, so we start a salary from here forward and look at last year with you separately.

Is there still time to fix this year? If the year is open, yes. A salary can start now, and a catch-up paycheck before December 31 can cover the year.

What should I bring? Your bank transfers, or a short note that cash went home and payroll never started, plus a rough profit figure.

Tell us about your year of draws