I just started my own s-corporation. How much tax should I be holding out?

Question

I pay myself a salary each week from my weekly gross earnings and want to make sure that I am holding back enough to cover taxes. I am currently pay myself 2/3 of the gross each week and put the other 1/3 into an account for tax purposes. I am an independant clinical contractor and the area of holding out enough taxes seems to be bit hard for other contractors to get a handle on. So I am looking for any help I can get.

Actually what I am looking for is the amount of Federal and self-employment. I am in Texas so there is not a State Tax.

Answer 1

If you are paying yourself a salary then depending on the information on your W-4 form the amount of withholdings are determined by formula. If instead of a salary you are paying yourself a "draw," which from whay you've said sounds more likely then you need to be paying quarterly estimated taxes using the tax tables in various IRS pubs. You should also be paying enough for self employment tax 15.3%.

Answer 2

Hi,
You probably want a payroll service like ADP or Paychex to handle your payroll and give you the withholding numbers.

The key thing is to pay yourself as low a salary as possible and reasonable to keep your FICA (self-employment) taxes low. See the discussion at http://en.wikipedia.org/wiki/S_corporation

I am a self-employed business owner and opened an LLC which is taxed as a pass-through entity - meaning I pay FICA self-employment taxes of 15%. For next year I will file as an S-Corporation (an LLC can do this). My accountant has agreed with this course of action. I wish I had known this previously, I would have saved thousands in FICA taxes.

All the best,
Guy

Answer 3

You can't just put that money into an account "for tax purposes." When you pay employees -- even if it's only paying yourself a salary -- you have to do the full-monte Payroll Tax nightmare.

Get a copy of IRS Pub 15 from the IRS website. Get a FEIN while you're at it -- you should even if you don't go the payroll route as it's safer than using your SSN on everything. If you're paying yourself a salary from the S-Corp, you'll have to file quarterly payroll tax returns and make the tax deposits to the bank. You'll also have to file the annual payroll return and pay the FUTA tax. You'll also have to file state payroll tax returns quarterly, pay the taxes in, and file the state's unemployment returns as well. All of that for one person on your payroll -- you!

It would be FAR simpler to pay yourself a "draw" and make the quarterly estimated payments using Form 1040ES. You'd also pay a bit less in payroll taxes that way, since you woudln't have to worry about the unemployment taxes.

Whatever profit is left over at the end of the year is fully taxable on your individual income tax return since an S-Corp is a pass-though entity so you're going to have to deal with the hassle of accounting for that and paying the self employment taxes on that so you might as well do it for all of the money you earn.

Answer 4

Here is a calculator you can use:
http://www.moneychimp.com/features/tax_brackets.htm