Interested in using an S corp to cut your payroll taxes? Here are some smart moves to protect yourself from the IRS:
- Make sure all payments are made to your corporation, not to you personally, and that contracts for work specify your corporation is the provider.
- Open a corporate bank account, and keep business and personal expenses separate.
- Investigate how much employees in your profession and geographic area earn–a number the IRS will use in determining “reasonable compensation” if you’re audited. If you pay yourself less than that rate, document why.
- If you have employees, pay yourself at least as much as the highest-paid one receives.
- Document the need to reinvest in your business–a rationale for retaining profits and not paying them to yourself as salary.
- Separate what you bill for your labors and what you bill for the work of subcontractors or other employees. Money earned from marking up other folks’ work is easier to wave off as profit.
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