Main Street Business

#554 How To Pay Yourself As An S-Corp In 2025

• Mark J Kohler and Mat Sorensen

Share episode

In this episode of the Main Street Business Podcast, Mark J. Kohler dives into the financial benefits of transitioning to an S corp. He highlights the importance of splitting income into payroll and draws, shares his foolproof 50/50 strategy, and explains why it’s a safe and effective approach. With practical advice on avoiding IRS scrutiny and optimizing your business structure, this episode is a must-listen for entrepreneurs and small business owners.

Here are some of the highlights:

  • Mark introduces the topic of transitioning from an LLC to an S corp, emphasizing the importance of how one pays themselves.
  • Mark splits life into operations and assets, explaining that operations could include a day job or a side hustle, while assets could include rental properties, brokerage accounts, and retirement accounts.
  • Emphasizes the importance of treating the S corp as a real business, including having a bank account, tax ID number, corporate book, and annual board meetings.
  • Explanation of the drawbacks of paying self-employment tax on an LLC, which is 15.3% on all profits.
  • The importance of properly allocating draws on paper and issuing a W-2 report to achieve tax savings.
  • How an LLC pays self-employment tax and state tax, while an S corp allows for splitting income into payroll and K-1 distributions to reduce tax liability.
  • Implementing a payroll matrix to help business owners determine the appropriate payroll percentage based on their profit.
  • The cost of converting to an S corp is justified by the significant tax savings achieved.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 2:

So you're an S-Corp owner or considering to make the transition from an LLC to an S-Corp. Well, how you pay yourself is absolutely critical. There is so much tax savings to have and I swear there are accountants all over the country that screw this up over and over again. The right strategy can mean the difference in $5,000, $10,000, or even $20,000 of extra income in your pocket. I'm going to break it down here now and information you can rely on. My name is Mark Kohler, a CPA attorney, bestselling author, and between YouTube, my podcast and 25 years of experience, I've helped thousands of small business owners make the transition to the S-Corp and manage it properly, saving them thousands and thousands of dollars. So let's get into it Now. The S-Corporation can either be directly formed as an Inc or you may have converted from an LLC to an S-Corp, but I'm assuming you're already there and you know that there's tax savings to be had. But let's put it in a visual representation. I think when you can see it, you can feel it and understand it better. And what I've been using for years is the trifecta. So let's go to the whiteboard With the trifecta down here, at the bottom would be your 1040 tax return. All your money flows downhill into your tax return and you may even have a revocable living trust Topic for another day. I'm going to split your life in half and I'm going to put operations over here, and this could be even your day job in a W-2 or your side hustle as an LLC. That's fine. Over here we're going to put your assets or your investments and this could be rental property, brokerage accounts, crypto, whatever and you may even have a 401k, iras, hsas, roth Okay, another topic for another day and your home is over here on the side. These assets we're not going to worry about right now. We want to focus here on operations. So what happens with the typical LLC is you're going to pay self-employment tax and it's a nightmare 15.3% on all of your profit. Remember, an LLC does not save taxes. Great for structure, legitimacy, getting the EIN, the bank account, learning about business, getting your bookkeeping going, making some money, but then you pay the dreaded self-employment tax. That's where the S-Corp comes in. Now, before I show how you're going to pay yourself and how much, that's the real issue I want to just talk conceptually here for a minute.

Speaker 2:

An S-corporation like an LLC and some of you may have come from the LLC video and you're graduated and you're over here. You should have a bank account for this entity. It should have its own tax ID number, a corporate book. You should have your annual board meetings. You should be treating this like a real business, because it is, and that's what's going to save you taxes and give you asset protection and protect you in an audit if the IRS comes knocking. So we want to be doing those little things and I know many of you are not perfect at it and that's okay, but we can always get better and our law firm and our Main Street Business Services company we've been helping clients for years do those things to keep their company legitimate. So let's assume you're there, money's coming in, you're paying for expenses, you've got a debit card or credit card dedicated to that business and you're really humming along, because once you're making $50,000 to $60,000 or more a year, you better darn well be an S corporation.

Speaker 2:

Now a second point. I want to answer how you pay yourself Anytime you freaking want. Take money out of your S-corp, out of your LLC, just like you have for years, weeks, months. Just take money whenever you want. It's called a draw. The trick is how you allocate it on paper how it's going to show up on your tax return and you're going to issue yourself a W-2 paycheck. Well, I should say a W-2 report, because you're not going to get a real paycheck and I don't want you to give yourself a real paycheck. Just take a draw whenever the hell you want and then we're going to call a piece of it a W-2 and call it payroll. That's where we're going to see some tax savings. Now let's compare the two on the whiteboard, because this is going to help you understand again how and how much to pay yourself. So let's say this is your LLC or just a plain old sole proprietorship, and this is your S-Corporation. We're not even going to worry about the C-Corp. They're a nightmare for small business owners. I hope none of you are in an S-Corp. We'll do a consult with you and help you get out of that if necessary.

Speaker 2:

Now the LLC, s-corp. Let's compare apples to apples. So let's see, you're making a hundred grand here, a hundred grand here. You're spending 20,000 in expenses here, 20,000 in expenses here, and again that can be cell phone dining, travel, home office electronics, kids, who knows what and you're going to net 80 grand. Okay, so apples to apples. It's the same bank account, same EIN, yada, yada. Well, over here you're going to pay 15.3% in self-employment tax. That's going to be close to 12 grand. Then you're going to pay state tax if you're in one of the 41 states that have state tax plus federal. Ouch, boom, boom, boom. That's why the LLC sucks, because it doesn't save you taxes. So over here on the S-corp, when you make this 80, what we're going to do is split that income into two different pieces. What we want to do is see that go partly as payroll and partly as K-1 or pass-through. This is the real trick.

Speaker 2:

Now for you accountants listening, you know what reasonable comp is and you're about to freak out because you're like oh, here it comes, mark Kohler's going to be too aggressive here. Let me just tell you I have helped thousands and thousands of clients nail their reasonable comp. I've come up with a matrix to help clients find that right dollar amount. I read every case on reasonable comp. I teach CE on reasonable Comp. I interview IRS agents on my podcast over and over again on Reasonable Comp and I've never had a client audited in 25 years on Reasonable Comp. But again some accountant is going to tell you people that. Oh, the IRS is auditing S-Corps now.

Speaker 2:

Watch out, because they're afraid of their own shadow or they don't want to admit they lost you money in the prior years because they didn't make the S election. So if your account is telling you no or freaking you out, get a second opinion. Or come to one of my Main Street tax pros, the speak smart caller and knows the real rules here and isn't again afraid of their own shadow. This is your tax return. It's your risk, not theirs. You are the captain of the ship. Take control and decide what you want on your tax return, which brings us to the payroll Cause. You know you can tell this is controversial. That's why I'm bringing this up. I don't know why it's controversial, frankly, after I just told you all of my track record and thousands of my clients and thousands of advisors that we've been training. But anyway, I get excited because I love this topic and I'm passionate.

Speaker 2:

So what you do in this example with your escort back to theboard, is we're going to take, just in this example and I think this is very, very reasonable, in fact probably conservative I'm going to take 50% in payroll and 50% in K-1. Now you've already paid yourself. Like I said earlier on, you're going to take a draw whenever you want, but on paper we're going to allocate 50% to payroll. So in this example it'd be 40 grand. We're going to put 40 grand to payroll and then 40 grand to draws. On paper You've already taken the 80 grand. I do not care. But we're going to do quarterly payroll reports where you're going to send in this form 941, and you're going to claim 10 grand of payroll, 10 grand of payroll, 10 grand of payroll, 10 grand of payroll. And then at the end you're going to get a W-2 for 40 grand.

Speaker 2:

Did you ever get a paycheck? No, and so you need to have a payroll service company that understands what's called, after the fact, payroll. What all of our payroll companies do at Main Street is call our business owners at the end of each quarter and say, hey, how much money did you take? Oh, I took a eight grand. Okay, cool, let's call half of that payroll, all right. And they do a report and you send in a deposit to the IRS. And why you're sending in that deposit is because of this, this 50 grand.

Speaker 2:

This is the secret. No FICA, no self-employment tax, no Obamacare On all of this pass-through, none of that. So instead of paying $12,000, you only pay six. You just cut it in half. We just saved six grand by converting to an S-Corp. That's it, and I know it's totally expensive to convert to an S-Corp. That's it, and I know it's totally expensive to convert to an S-Corp we charge $250. Super easy.

Speaker 2:

Now, an S-Corp tax return will probably cost you about a thousand or more, and you got to do payroll reports throughout the year. Plan on 500 bucks there. So the S-Corp could easily cost you $1,500 in accounting services throughout the year. But let me get this straight Now. This is hard math. I know, this is super hard math. Save $6,000 if I spend 1500. I don't know, I don't know, mark, it doesn't sound like a good deal. What are you crazy? This is why the S-Corps makes so much freaking sense. Every dentist, doctor, engineer, accountant, lawyer, realtor, landscaper, restaurant owner, me we are all S corporations and this is what we do. Joe Biden had a freaking S corporation for his book deal back in 2016. He had a $12 million book deal and took salary of 800 grand. He saved almost $300,000 or more in FICA.

Speaker 2:

Everybody is doing this. It's okay. So if your accountant is freaking out, you've got the wrong accountant. And if you're listening to this as an accountant and you're like, oh my gosh, mark, I'm with you, I believe you, I hear you. Please go do a demo at markjkohlercom and check out my certification program. I'll bring you clients. We've got 12 modules and 70 topics. This is just one of them and you, business owners, you can go to that same website, markjkohlercom, go to services and look at the network and you can find thousand plus members that would like to have your business, that meet with Mark Kohler and the whole crew every week and are certified all in the same topics.

Speaker 2:

People, I hope you're getting the sense here. This is not that hard, it's not that aggressive and it's freaking amazing. So let's summarize. I want to make sure you get this one more clean piece of paper. So if you have an S corporation, we're going to put that right in the middle here. Make it simple.

Speaker 2:

So here's my little S corp. And let's say you're a realtor and you're bringing in 150 grand and you're going to spend 50 grand on all sorts of expenses marketing, home office, auto dining, travel, blah, blah, blah, right. So 50K in expenses and you net 100. Okay, this situation. I might take 40% in payroll. Oh, so I'm going to do 40 grand in payroll and take 60 grand with no FICA, none of that right. I just saved $9,000. See, the more money you make, the more you save. With an S-corp, again, you're just taking the money anytime you want, but we're going to do this payroll report quarterly and kick out a W-2 at the end of the process, and your accountant will know how to do this. You just need to be engaged in the process and make sure they're not too conservative or too aggressive.

Speaker 2:

So to help you do this, I created a payroll matrix. Now I've got articles on this and more videos on it. You can deep dive on it, but here's what it looks like generally. In this matrix we're going to put down here at this axis, how much money you're making. This is your profit that you're taking out of the business.

Speaker 2:

Here we're going to talk about your payroll percentage. So your payroll percentage might be zero. You take no payroll, or you take a hundred percent payroll. Here you might have zero money, or you're making 500 grand. What's interesting is, you make more money. Your payroll actually goes down as a percentage of your profit. So here I might be at about a hundred grand, and so I might take 40% in payroll. Now, if I'm at 50 grand, I might take 50% or 60% in payroll. If I'm at 400 grand in profit, I might take 20% in payroll.

Speaker 2:

So this, you don't freak out the IRS computer system. You're in a reasonable area here. And accountants, you don't need software to do this. This is it. It's subjective, it's easy, it's simple. You go under the radar. The IRS is not going to chase you down. It's the client that wants to take 10 grand in payroll when they made 300 grand. Right, you know they're going to get audited and they do. This is reasonable, it works. Never, ever, ever, had a problem with this approach, this matrix. Now, this is a subjective approach to get started, but we're right in this realm every time.

Speaker 2:

So, in summary, if you're a business owner, I've got all sorts of links down below to get to the network to find an account and get my 30 ultimate guide. I've got other videos, my podcast. I want to help you succeed as a small business owner, and the S corporation is amazing. It's a wonderful tool to help you do that. Now, if you're an accountant, a bookkeeper, ea, a CPA attorney, please go check out the network. This advisory program is affordable. You get to be on my network and get leads all day long. You can learn so many strategies that you can help train your own people with, and I'll put them in my program so you can be out there billing and making more money.

Speaker 2:

The path to advisory is real. I want to help you convert your compliance clients to advisory Topic for another day. Links down below. See you at a demo, no obligation. My enrollment team is amazing. Go check it out. And to all of you, the American dream is real. I love it. I'm a business owner and real estate investor and crypto investor too. I do everything I talk about and I love it and I'm so grateful. You watched this video. Please subscribe below. I'm not going anywhere and I'll see you on the backside.

People on this episode

Head Shot

Mark J. Kohler

Host