When business owners set up an S Corporation and creates a business entity, it is usually an accountant or bookkeeper (or both) that crank out the profit and loss statements for an S Corporation owner. What can be confusing at the end of the year, because an S Corporation owner has multiple methods to receive cash through the business, is to actually figure out what you made in the business. Taxes in many cases can be even more confusing to the S Corporation business owner. Here’s a ‘your smart money moves’ breakdown to figure out just how much you made in your business.
- Salary- When you own an S Corporation, the IRS has salary guidelines on how much you should be paying yourself. The IRS has created an outline of what’s called “reasonable compensation” that should be paid to the owner. There are a myriad number of factors including industry averages, number of hours worked, and what is being paid to other employees in the company. S Corporation owners don’t generally like to pay themselves salary because their profits escape half of the social security tax, etc., but one form of ‘how much did I make’ is the salary you pay yourself.
- Net Profit- After you tally up all of your revenue and you subtract out all of your expenses, your profit and loss statement will either be in the black or the red. What’s really relevant is that if the business is profitable, your business checking account should go up every month. The real tricky part of figuring how much you actually made is that once the money is in your business checking account you have some choices. You can choose to reinvest the money in the business. You can choose to let it sit in the bank account. You can choose to move money from your business account to your personal checking account. This is what is known as a distribution. As with all corporations, the profit and loss may not tell the whole story. What you earned in your mind will technically be the money you moved from the company to you minus the federal and state taxes you’ll have to pay on that money.
- Add Backs- Many business owners will have items that the business pays for them in the course of doing business. This can range from a cell phone to meals and entertainment. Although this isn’t a form of cash compensation, an S Corporation owner should try to note what kind of expenses the business is picking up as otherwise they would have to pay for them out of pocket with after tax money. These expenses should be considered in the analysis of what you made as the owner.
- Loans- Some owners don’t pay themselves a distribution, but they take loans from the company. This is a way to extract compensation from the company and keep the net profits down in the business.
For any owner, it can be a challenging exercise to figure out what you actually made. This is definitely true for an S Corporation owner. If you use this outline, you’ll have a better idea of what you actually made in your business.
Written by: Ted Jenkin