The Zero Dollar Paycheck
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Every situation is different, however the backward looking method of determining your paycheck offers the best flexibility for S-Corps, especially with fluctuating cash flows and profit levels. For example, you earned $20,000 for Q1 and you withdrew $20,000 in cash over the quarter. For Q1’s payroll, we would re-classify $10,000 as wages and run that through payroll, but we would create an employee deduction back to the company so the paycheck would be $0. Therefore only taxes are being withdrawn from your account, and not an entire wage plus taxes.
In other words, it is unnecessary to stockpile $10,000 in your business account just to run payroll for half of Q1’s net profits. You would only need to keep enough cash available to cover the taxes, and we can plan for that payment about 30 days out from the due date. Make sense?
Taxpayer’s Comprehensive Guide to LLCs and S Corps
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