Converted to S-Corp This Year, But Never Set Up Payroll

[ReadySetMillionaire]

My accountant talked me into converting my law practice from a sole proprietorship into an S-Corp earlier this year.  I timely sent in the formal conversion in March.

Honestly, ever since, I regret it.  He said I would save $5-6k in taxes, but man, I don't think it's worth it. It has made my accounting so much more difficult. It has most distressingly caused a nightmare in that I cannot seem to get payroll to work. I started the process but then ran into a problem with the payroll provider.  Then I ran into a problem with my state's department of tax.  Then it was another thing.  And another thing.

I know, no excuses.  I had a phone call with my accountant today and he advised of two options:

1. Suck it up, sign up for payroll, and pay myself my yearly salary over the next three months.  This would make cash flow tight but I could probably do it.

2. Quoting here: "One thing you can consider doing is simply giving yourself a 1099 for $36,000 instead of doing payroll. You would be running the risk of getting audited for it, but it is something that a few of our customers do because they don't want to deal with payroll and they are willing to take the chance." He went on to advise of a bunch of caveats and that I'm exposing myself to audit.

So, what to do here?  I obviously messed up in not getting payroll up and running back in March, but this is my second year as a company and my first as an S-Corp.  I am truly a one-man operation, and this is the one thing that I let slip under the rug, admittedly for way too long.

My priorities are to not get audited (obviously) and to make sure I pay all appropriate tax.

I am meeting my accountant Thursday and wanted to be prepared for the discussion, hence this thread.  Any suggestions?

[SeattleCPA]

He said I would save $5-6k in taxes, but man, I don't think it's worth it. It has made my accounting so much more difficult.

It should save more than $5K or $6K. Probably double that unless you're in CA.

Also, it hasn't really made your accounting more difficult... unless you simply haven't been doing your accounting.

The thing you need to do, probably, is outsource your payroll. Spend the $1000 or whatever to have a full service payroll solution. That payroll burden and then the S corp tax return represent the only extra work of having an S corporation.

It has most distressingly caused a nightmare in that I cannot seem to get payroll to work. I started the process but then ran into a problem with the payroll provider.  Then I ran into a problem with my state's department of tax.  Then it was another thing.  And another thing.

S corps often stress someone the first few months and year. You're setting up the payroll which is often a new thing. And then you're learning to do "real" accounting often (since that's required for the actual S corporation return). But these are really just learning curve issues.

Also this note: Unless you decide to never grow beyond a one person operation, you will have some point have to set up a payroll system to deal with that first (and any subsequent) employees.

I know, no excuses.  I had a phone call with my accountant today and he advised of two options:

1. Suck it up, sign up for payroll, and pay myself my yearly salary over the next three months.  This would make cash flow tight but I could probably do it.

Two hacks for making the payroll situation easier this year. First, be sure to correctly report your health insurance as wages. That'll give you a chunk of wages to report on your S corp tax return...

E.g., if you have $10K of health insurance, do the accounting right and that'll create $10K of wages but wages that aren't subject to income taxes or payroll taxes.

Second, probably you can do a third quarter payroll tax return that looks back at July, August and Sept and says, in effect, hey that first $16K I paid out to myself? Yeah, let's call that $16K payroll and report on the third quarter 941 return due in roughly a month. That'll trigger $2448 of federal payroll taxes. But that deposit can be made in roughly a month with the 941 return because it's considered "de minimis."

Then whatever else you need you can deal with in the fourth quarter. But you'll have a head start...Using the examples above, you might have a $26K head start with $10K of health insurance an $16K from the third quarter.

2. Quoting here: "One thing you can consider doing is simply giving yourself a 1099 for $36,000 instead of doing payroll. You would be running the risk of getting audited for it, but it is something that a few of our customers do because they don't want to deal with payroll and they are willing to take the chance." He went on to advise of a bunch of caveats and that I'm exposing myself to audit.

People do the above... But I think it's a bad idea given you still have time to do this correctly and in process get your payroll set up.

BTW, to provide context for my remarks, I have prepared thousands of S corporation returns...

P.S. You might find my S corporation FAQ useful: http://www.scorporationsexplained.com/scorpexplained-faq.htm
and we've got quite a bit of S corporation info at our blog: https://evergreensmallbusiness.com/?s=s+corporation

[trollwithamustache]

Dude, you need an accountant that will face punch you. There are a mess of online services to automate a whole bunch of this. I use Xero, I know a lot of people that like Wave. It takes like an hour to invoice my clients, and then another hour to enter it into the system, and record/reconcile/whatever tidbits need to be done for the month.

[Malum Prohibitum]

ReadySetMillionaire,

I am an attorney with an S-Corp.  Here is what I do.  I use Quickbooks.  Easy.  No different than being a sole proprietor.  All my entries get entered.  Pay for monthly fee on my billing software?  I enter it.  Collect a legal fee?  I enter it.  None of that changes based on being an S-Corp or a sole proprietor.

ADP.  I use ADP to run payroll.  I did that because I had employees, but, after I got rid of my employees, I kept it because it makes paying myself SO DAMN EASY.  I enter my payroll twice a month, and a check, net of taxes, arrives by direct deposit in my bank.  When I refinanced my home recently, I even had check stubs (LOL!) to show the bank. I no longer have to worry about payroll taxes and withholding.  It is all basically done for me.

Yes, there is a cost to using ADP, but it's well worth it.

My salary is low (but reasonable).  So I withhold taxes at a higher rate to make up for distributions that I pay myself without withholding taxes.  I do those distributions just by writing a check.  I then enter that transaction into Quickbooks as Shareholder Distributions.

My accountant simply logs on to my Quickbooks after it is closed out for the year and (usually a couple of clarifying questions later) spits out my corporate taxes.  Then, later, my individual taxes.

As SeattleCPA said above, the tax advantages are worthwhile.

Using ADP takes care of payroll taxes and income tax withholding so I do not have to worry about it at all. 

I have my 401(k) through the ABA Retirement program (they do not care that I am not a member of their commie union) and send a check to them twice a month to correspond with my paycheck.  I enter on ADP online the amount that is being withheld for 401(k) (just once if it stays the same all year) and clarify over the phone with APD the amount that is "employer matching) so that my paperwork is correct at the end of the year.

You are making this unnecessarily difficult for no reason. 

Make it easy.  Quickbooks.  ADP.  Problems solved.

QBI deduction (nothing to sneeze at, this made a huge difference for me and you are under the income limit this year based on what you have written here on this forum and can take full advantage of it). Given your income, you will have no problem setting a salary low enough to save a bundle on payroll taxes.  There is no payroll tax on distributions because distributions are not payroll.  And being self employed you pay both halves of the payroll tax yourself, so this automatically saves you 15.3% on every dollar you distribute rather than pay out as salary.  What is a reasonable salary for an attorney at a law firm that has total pre-tax and pre-expense revenues of, say, $130,000?  I do not think the IRS would even blink at a salary well below the social security cap (LOL! which is more than $130k this year). 

I typically adjust my payroll throughout the year to make it come out half and half or close to that. That is, if my income is going to be $100,000, I'll strive to pay myself a salary of $50,000 and pay the rest through distributions.   I just look at reports in Quickbooks about halfway through the year and again later to see if I am on target, and, if not, I adjust the salary up or down. 

 Then I get the QBI deduction (woo hoo!) take the standard deduction ($24k now, woo hoo!) and my 401(k) deduction and HSA . . . you see where this is heading. 

Definitely worth the headache.  At your income level, the payroll tax savings all by itself should not be disregarded as insubstantial.

[ReadySetMillionaire]

He said I would save $5-6k in taxes, but man, I don't think it's worth it. It has made my accounting so much more difficult.

It should save more than $5K or $6K. Probably double that unless you're in CA.

Also, it hasn't really made your accounting more difficult... unless you simply haven't been doing your accounting.

The thing you need to do, probably, is outsource your payroll. Spend the $1000 or whatever to have a full service payroll solution. That payroll burden and then the S corp tax return represent the only extra work of having an S corporation.

It has most distressingly caused a nightmare in that I cannot seem to get payroll to work. I started the process but then ran into a problem with the payroll provider.  Then I ran into a problem with my state's department of tax.  Then it was another thing.  And another thing.

S corps often stress someone the first few months and year. You're setting up the payroll which is often a new thing. And then you're learning to do "real" accounting often (since that's required for the actual S corporation return). But these are really just learning curve issues.

Also this note: Unless you decide to never grow beyond a one person operation, you will have some point have to set up a payroll system to deal with that first (and any subsequent) employees.

I know, no excuses.  I had a phone call with my accountant today and he advised of two options:

1. Suck it up, sign up for payroll, and pay myself my yearly salary over the next three months.  This would make cash flow tight but I could probably do it.

Two hacks for making the payroll situation easier this year. First, be sure to correctly report your health insurance as wages. That'll give you a chunk of wages to report on your S corp tax return...

E.g., if you have $10K of health insurance, do the accounting right and that'll create $10K of wages but wages that aren't subject to income taxes or payroll taxes.

Second, probably you can do a third quarter payroll tax return that looks back at July, August and Sept and says, in effect, hey that first $16K I paid out to myself? Yeah, let's call that $16K payroll and report on the third quarter 941 return due in roughly a month. That'll trigger $2448 of federal payroll taxes. But that deposit can be made in roughly a month with the 941 return because it's considered "de minimis."

Then whatever else you need you can deal with in the fourth quarter. But you'll have a head start...Using the examples above, you might have a $26K head start with $10K of health insurance an $16K from the third quarter.

2. Quoting here: "One thing you can consider doing is simply giving yourself a 1099 for $36,000 instead of doing payroll. You would be running the risk of getting audited for it, but it is something that a few of our customers do because they don't want to deal with payroll and they are willing to take the chance." He went on to advise of a bunch of caveats and that I'm exposing myself to audit.

People do the above... But I think it's a bad idea given you still have time to do this correctly and in process get your payroll set up.

BTW, to provide context for my remarks, I have prepared thousands of S corporation returns...

P.S. You might find my S corporation FAQ useful: http://www.scorporationsexplained.com/scorpexplained-faq.htm
and we've got quite a bit of S corporation info at our blog: https://evergreensmallbusiness.com/?s=s+corporation

Awesome reply.  Thank you so much for your time and thoughtful response.  I'll bring this up in my meeting tomorrow.

To be clear, I am trying to do a full payroll solution (choosing Square, unless you recommend otherwise), but I cannot get Payroll ID numbers from my state (Ohio). I have made 3-4 phone calls and it's a never-ending loop of doom and getting nothing accomplished.

Regarding the accounting, I have kept up with it, it just takes me a bit longer in Quickbooks than self-employed. For instance, instead of just categorizing expenses, now I have vendors, the categories are a bit more confusing, etc. Also, I used to just take draws whenever I wanted, and now I've always had payroll on the back of my mind.

Once I get payroll up and running, I'm sure it will be fine.

Do you think a $36k salary is enough given the net income?

[ReadySetMillionaire]

ReadySetMillionaire,

I am an attorney with an S-Corp.  Here is what I do.  I use Quickbooks.  Easy.  No different than being a sole proprietor.  All my entries get entered.  Pay for monthly fee on my billing software?  I enter it.  Collect a legal fee?  I enter it.  None of that changes based on being an S-Corp or a sole proprietor.

ADP.  I use ADP to run payroll.  I did that because I had employees, but, after I got rid of my employees, I kept it because it makes paying myself SO DAMN EASY.  I enter my payroll twice a month, and a check, net of taxes, arrives by direct deposit in my bank.  When I refinanced my home recently, I even had check stubs (LOL!) to show the bank. I no longer have to worry about payroll taxes and withholding.  It is all basically done for me.

Yes, there is a cost to using ADP, but it's well worth it.

My salary is low (but reasonable).  So I withhold taxes at a higher rate to make up for distributions that I pay myself without withholding taxes.  I do those distributions just by writing a check.  I then enter that transaction into Quickbooks as Shareholder Distributions.

My accountant simply logs on to my Quickbooks after it is closed out for the year and (usually a couple of clarifying questions later) spits out my corporate taxes.  Then, later, my individual taxes.

As SeattleCPA said above, the tax advantages are worthwhile.

Using ADP takes care of payroll taxes and income tax withholding so I do not have to worry about it at all. 

I have my 401(k) through the ABA Retirement program (they do not care that I am not a member of their commie union) and send a check to them twice a month to correspond with my paycheck.  I enter on ADP online the amount that is being withheld for 401(k) (just once if it stays the same all year) and clarify over the phone with APD the amount that is "employer matching) so that my paperwork is correct at the end of the year.

You are making this unnecessarily difficult for no reason. 

Make it easy.  Quickbooks.  ADP.  Problems solved.

QBI deduction (nothing to sneeze at, this made a huge difference for me and you are under the income limit this year based on what you have written here on this forum and can take full advantage of it). Given your income, you will have no problem setting a salary low enough to save a bundle on payroll taxes.  There is no payroll tax on distributions because distributions are not payroll.  And being self employed you pay both halves of the payroll tax yourself, so this automatically saves you 15.3% on every dollar you distribute rather than pay out as salary.  What is a reasonable salary for an attorney at a law firm that has total pre-tax and pre-expense revenues of, say, $130,000?  I do not think the IRS would even blink at a salary well below the social security cap (LOL! which is more than $130k this year). 

I typically adjust my payroll throughout the year to make it come out half and half or close to that. That is, if my income is going to be $100,000, I'll strive to pay myself a salary of $50,000 and pay the rest through distributions.   I just look at reports in Quickbooks about halfway through the year and again later to see if I am on target, and, if not, I adjust the salary up or down. 

 Then I get the QBI deduction (woo hoo!) take the standard deduction ($24k now, woo hoo!) and my 401(k) deduction and HSA . . . you see where this is heading. 

Definitely worth the headache.  At your income level, the payroll tax savings all by itself should not be disregarded as insubstantial.

Thanks for your kick up the ass.

I think you know from my Employment Dilemma thread that I've handled most stuff well for my practice.  This payroll thing is probably the only thorn in my side.  It's just every time I sit down to resolve it, something else comes up and I can't seem to set it up. Then an appeal brief is due and I punt it for another week, then it's two weeks, etc.

I cancelled everything Friday and am resolving this one way or another.

Regarding ADP, it just seems too pricey of an option. I'm a one man show. At most I will hire one other person, and I have no present desire to grow beyond that.

I was thinking about doing Square. It's reviews are good for small operations like mine. Any thoughts?

[Kronsey]

Good advice from Seattle CPA.

I'll add a few more steps/comments:

1. Stop trying to DIY payroll. Use gusto.com for payroll. It is $39/month plus $6/month per employee. It is super easy IF setup properly. It is well worth $45/month. All my clients are on Gusto. Easy for them and easy for me.

2. Consider paying someone to help you get setup properly in Ohio. I have a client with employees who work from home. Two happened to be in Ohio. I've dealt with payroll setup/registration in most states, and Ohio is one of the tougher states to deal with. Get some help to save yourself a lot of headache. Frankly I'm surprised this isn't a service your accountant offered.

3. If you don't understand QBO, pay for some training. Yes, you could watch YouTube tutorials and read blog posts all day, but how much is your time worth?

The S-Corp should be a good solution for you, it just sounds like you're struggling some with the changes and implementation. Climb over this mountain, and it will be smooth sailing from here.

[SeattleCPA]

Do you think a $36k salary is enough given the net income?

That seems pretty low to me. But whether number is reasonable depends on the distributions and distributive share.

E.g., if your total business profit is $72K... and you're paying the shareholder $36K in base wages, $12K in health insurance, and doing a 25% SEP contribution (so another $12K), you're going to be rock solid.

After subtracting $36K base wages, $12K health insurance, and $12K SEP, only $12K remains and IRS doesn't have time and probably doesn't care about that.

If you're making $172K? Hmmm. Hard to believe $36K  base would work...

[SeattleCPA]

Regarding ADP, it just seems too pricey of an option. I'm a one man show. At most I will hire one other person, and I have no present desire to grow beyond that.

I think one looks at this the wrong way if one focuses on price of ADP or Gusto (which btw we now use).

Look at the $1K annual cost, compare that to the $10K a year of savings and the hours of time savings, decide if that's a good return.

If it is, do it.

If it isn't, dissolve the entity and go back to being a sole proprietorship. And then, obviously, keep your practice small enough that you never need an employee.

[Malum Prohibitum]

ADP - price is well worth it, and they work with my accountant if there are any glitches.   

I can't comment on the other payroll service.

As for $36,000 being enough - how much is your profit going to be?  What I am asking is, if you pay yourself $36,000 (and this includes your part of the 401(k) and the health insurance Seattle CPA is suggesting, if you do it that way) this is roughly gross payroll of $1500 (36,000/24=$1500)

Are your distributions going to be about the same, that is, roughly 1500 twice a month, or $3000 a month?

If so, then that is basically the rule I use.  I try to keep my salary about equal with my distributions.  I check on this late summer or so on Quickbooks and once again in the fall and see how much my Shareholder Distributions have been for the year (look in reports) and then adjust my salary so they come out about equal at the end of the year (my salary is usually a little higher than distributions).

$36,000 might be low, but I do not know what your profitability is.  I though you mentioned $150k gross anticipated by the end of 2019, but that gross revenue figure does not tell me how much you can pull out of the business.  I remember your rent is pretty low, but you need to sit down and look at your costs and what you are paying in shareholder distributions and then decide what is a reasonable salary.

As for quickbooks, I second the suggestion to take a class.  My accountant offered one, and I took it, and it sped up my learning curve immensely.  I do not use Quickbooks for billing.  Just accounting.  I do not know if Quickbooks still offers a desktop version, but I still use the old desktop version, so it was a one time expense for me, not ongoing. It looks like they still sell it for $299.  I have been using it for a decade now, so . . .

[feelingroovy]

My opinion as a small business owner. I am not a lawyer but a consultant/trainer expert in another field.

Do not take a QB class. Hire a damn bookkeeper to do this crap for you. The opportunity cost of you spending time on this is much larger than the $30/hour to hire someone who knows what they're doing already.

I say bookkeeper, but mine handles actual bookkeeping (reconciling books, tracking receipts, etc) plus payroll, plus accounts payable ( pays all bills), plus accounts receivable ( sends invoices and makes sure they are paid).

She still uses payroll software. I think it's Intuit payroll.

Your accountant may already have these services or you may be able to find a VA who does.

This doesn't mean you totally abdicate all this stuff. I still get weekly reports on cash flow, monthly P&L, etc.

But delegating the details is totally worth it.

[Malum Prohibitum]

He is a one man shop.  I doubt he would spend an hour a week on Quickbooks.  I don't.

[Kronsey]

He is a one man shop.  I doubt he would spend an hour a week on Quickbooks.  I don't.

I realize this is the MMM forum which is heavily slanted towards the DIY crowd. I actually choose to do many home repairs, mowing, etc knowing that opportunity cost would say I should outsource and focus on my work because it pays way more and it takes me way longer to do the repair than a professional because I might do it a few times a year as opposed to 40+ hours a week.

For me, the deciding factor is how much you enjoy earning your living. If you like your SE gig, you should outsource and put your nose down for billing hours/projects, etc. If you hate your job, maybe lean towards DIY.

I'd rather clean toilets than do tax returns, but alas, tax returns are one of my chosen skill sets and it would be foolish to try to start a second career at this point before getting to FI. Because of that, I tend to DIY and do less actual work. The math to FIRE would say the opposite assuming you can bill yourself out for more than you can hire the task done for.

It's really just Biz 101 which was exactly what @feelingroovy was saying in the post above yours :)

You can "it's just one more hour a week!" to the point of creating a part time job for yourself with all the necessary tasks to run a small biz.

Why hire a cleaning person for $80/month? It only takes me one hour a week to pick up my office...

Why have an IT support contract for $100/month? It only takes me watching some YouTube videos to figure out how to fix the problem...

Why hire a CPA to do my taxes? I can use TurboTax and save $800/yr and it only takes me two days and I have no idea if I've done them correctly...

I could keep going, but I bet you get the point.

The DIY mantra is more math efficient for those in salary W-2 positions who have very little ability to increase their earnings. For those of us who are biz owners or self-employed, the math just doesn't make sense assuming you aren't a hack and have a steady flow of work.

[ReadySetMillionaire]

Interesting discussion here.

I generally DIY everything aside from doing my actual tax returns.  I clean my office, do everything to mail/file pleadings and letters, invoicing, banking, mileage tracking, IT, etc.  I'm pretty self-sustaining. 

Honestly, I generally like this part of owning my own firm. Practicing law eight hours a day is boring.  Today, for instance, I am putting my head down to get this payroll resolved, and I have a couple other non-legal things to do. I like the break in things.

That said, I might eventually hire someone for 10-12 hours a week.  I think I would do this after I've paid my student loans and/or mortgage (still undecided on the latter).

I'm fine with Quickbooks. I spend about five minutes a week on it. All I was saying was that the Quickbooks Self-Employed was just way easier, and there was a learning curve with regular Quickbooks.  I'm pretty good at it, and I met with my accountant months ago and he gave me a tutorial on categorizing everything.

***

I met with my accountant yesterday and he green-lighted the plan to run payroll over the next three months in three big chunks.  He thinks $40,000 salary is good if net revenues are $120,000.  He says, generally, that 1/3 of net revenues won't get you in any hot water.  And, he says, having a practice in its first full year, this is fine.

Per the recommendations here, I'm going to take a look at Gusto and ADP.  ADP just seems like a lot for a one man shop.  I'll let you guys know how it goes.

[Kris]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

[ReadySetMillionaire]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

I saw this when I was considering doing payroll on my own.  My only concern was actually mailing everything to every relevant state and federal department of tax.  Is this easier than it seems?

[Kris]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

I saw this when I was considering doing payroll on my own.  My only concern was actually mailing everything to every relevant state and federal department of tax.  Is this easier than it seems?

Yeah, that’s why I hesitated to suggest this book/technique earlier in the thread. My business is such that I don’t really have to do that.

That said, when I was trying to decide whether to adopt this method, I had a couple of questions and emailed the author. He wrote back very quickly and was very helpful. So you might want to ask him personally about your situation.

[CareCPA]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

I saw this when I was considering doing payroll on my own.  My only concern was actually mailing everything to every relevant state and federal department of tax.  Is this easier than it seems?

Yeah, that’s why I hesitated to suggest this book/technique earlier in the thread. My business is such that I don’t really have to do that.

That said, when I was trying to decide whether to adopt this method, I had a couple of questions and emailed the author. He wrote back very quickly and was very helpful. So you might want to ask him personally about your situation.

Gosh, if only we knew who that author was, we could ask him right in this thread...

[Kris]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

I saw this when I was considering doing payroll on my own.  My only concern was actually mailing everything to every relevant state and federal department of tax.  Is this easier than it seems?

Yeah, that’s why I hesitated to suggest this book/technique earlier in the thread. My business is such that I don’t really have to do that.

That said, when I was trying to decide whether to adopt this method, I had a couple of questions and emailed the author. He wrote back very quickly and was very helpful. So you might want to ask him personally about your situation.

Gosh, if only we knew who that author was, we could ask him right in this thread...

LMAO. Unreal. Small damn world.

So yeah, @ReadySetMillionaire ... turns out, @SeattleCPA is the author of that monograph!

[SeattleCPA]

Since your accountant thinks $40,000 salary is good, I'm going to throw out this recommendation. This is how I do my payroll -- by myself.

https://evergreensmallbusiness.com/ebooks/five-minute-payroll-ebook/

I saw this when I was considering doing payroll on my own.  My only concern was actually mailing everything to every relevant state and federal department of tax.  Is this easier than it seems?

Yeah, that’s why I hesitated to suggest this book/technique earlier in the thread. My business is such that I don’t really have to do that.

That said, when I was trying to decide whether to adopt this method, I had a couple of questions and emailed the author. He wrote back very quickly and was very helpful. So you might want to ask him personally about your situation.

Gosh, if only we knew who that author was, we could ask him right in this thread...

LMAO. Unreal. Small damn world.

So yeah, @ReadySetMillionaire ... turns out, @SeattleCPA is the author of that monograph!

So these comments about the "five minute payroll system"...

Some states don't levy payroll taxes on shareholder-employees. In that case, "payroll" really only requires someone to file a 941 return each quarter which reports on the quarterly earnings. And that 941 looks the same every quarter. You can also set this up so you just make the tax deposit when you send in the 941.

Bottomline: You can make payroll really easy in a single employee, single shareholder S corporation situation...

Also this reality: When you use this "hack" you want to offload the W-2 and W-3 fiddling onto your CPA or tax accountant.

But then these comments just between us chickens...

(1) You got to be organized to use this approach. It can work great for people who have "paperwork discipline." And that's true even if you have to deal not just with the federal 941 return but equivalent state returns. But it's surprisingly common for small business entrepreneurs to not possess this discipline.

(2) I totally agree with discussion participants who recommend outsourcing payroll to some payroll service. Especially if someone has already gotten behind on payroll or has procrastinated about the paperwork. Note that our CPA firm doesn't do payroll (except for some long time clients who we're always trying to move to Gusto or ADP). So I have some objectivity here I think. Payroll services are, I think, a cost of having an S corporation.

P.S. Many states also require quarterly payroll tax returns for shareholder-employees for SUTA and to report on state income taxes withheld. Those payroll tax returns can be handled the same way... BUT THIS CAUTION: The Five Minute Payroll System ebook doesn't tell you how to do those returns.

P.P.S. I think we get free payroll from Gusto and used to get free payroll from QuickBooks (and can probably get free payroll from anybody since the vendor hopes we'll refer them business). But we outsource payroll for our five employee small business. And would even if we had to pay the $500 or $1000 a year.

[ReadySetMillionaire]

Thanks for the replies everyone.  I ended up picking Square's services.  It had a pretty similar interface to Gusto and was $10/month cheaper.  Square takes care of everything, except paying my quarterly estimates on my distributions.  Thus, I think this was a pretty good solution that will save me a ton of time and aggravation.

I am paying myself a $36,000 salary for the year.  I did not get my S-Corp approval from the IRS until early June, so my accountant thinks this is a reasonable salary given that I was not notified that I could pay myself as a W-2 until midway through the year.  My accountant also suggested that if I have a great next couple months, we can (a) bump this up for my last payroll run, (b) buy supplies to drive down profits, or (c) some combination of the two.  Seems like a good plan.

Next year I am likely going to do a $50,000/salary, or about $4,000/month.

Thanks again for all of those who commented.

[ReadySetMillionaire]

Here's a question for @SeattleCPA and others -- I presumed I would have enough cash flow to pay the $12k/month.

I don't know if it' some kind of conspiracy against me, but I now have almost $19,000 in outstanding invoices.  That is way, way, way higher than ever and mostly comes down to three clients with $4,000+ due.

If I can't make my final payroll, am I better off just lowering the payroll amount (e.g., down to $6k, bringing salary to $30k), or should I kick money back into the company?

[trollwithamustache]

Here's a question for @SeattleCPA and others -- I presumed I would have enough cash flow to pay the $12k/month.

I don't know if it' some kind of conspiracy against me, but I now have almost $19,000 in outstanding invoices.  That is way, way, way higher than ever and mostly comes down to three clients with $4,000+ due.

If I can't make my final payroll, am I better off just lowering the payroll amount (e.g., down to $6k, bringing salary to $30k), or should I kick money back into the company?

outstanding or past due?

[SeattleCPA]

Here's a question for @SeattleCPA and others -- I presumed I would have enough cash flow to pay the $12k/month.

I don't know if it' some kind of conspiracy against me, but I now have almost $19,000 in outstanding invoices.  That is way, way, way higher than ever and mostly comes down to three clients with $4,000+ due.

If I can't make my final payroll, am I better off just lowering the payroll amount (e.g., down to $6k, bringing salary to $30k), or should I kick money back into the company?

I would think you don't lower payroll. The shareholder distribution should be the thing that swings... not the employee wages.

So options... #1 You could kick money back into corp... that works.

#2 You could still file a Q3 payroll return and report some of your distributions from July, Aug and Sep as wages. I'll bet there's an extra $6K there. That return is due 10/31...

[BicycleB]

Great thread in case I ever start a small business. Yay, team!