S Corps have a lot of buzz about them. If they were at Beverly Hills High in the ’90s, S Corps would be the Cher of the school: popular, sought after, and a total betty despite their flaws. But like Cher, S Corps cost some serious cash to maintain.
Sure, you don’t have to have a computerized closet to run an S Corp, but you do need to be prepared to spend more than if you were a sole proprietor. If you don’t want to end up totally buggin’ mid-year, you should know the costs of running an S Corp before you start one.
Here’s a list of the ongoing costs you’ll have if you start an S Corp:
One of the differences between an S Corp and a sole proprietorship or LLC is that you, the owner, must pay yourself as an employee of your business.
How much you pay yourself is up to you, but it must be “reasonable compensation” for your industry.
But I already pay myself through an owner draw. How would this be any different?
When you pay yourself through an owner draw, you receive the whole amount. You pay yourself $3,000, and you get $3,000.
But when you pay yourself a salary, payroll taxes and income taxes are withheld from your paycheck. You pay yourself $3,000, and you get $2,500.
That means if you want $3,000 to land in your checking account, your salary needs to be closer to $3,500, which is $500 more than you’re used to paying.
The extra $500 that you pay yourself isn’t actually an additional cost. If you were a sole proprietor, you would still pay that money in taxes quarterly or annually.
The difference is, through payroll, you pay your taxes in real-time. Which means you need money to cover your taxes now, rather than waiting until the end of the year.
One of the biggest mistakes I see is people starting S Corps when they don’t have the cash flow to cover ongoing payroll runs. They can’t afford to run payroll, so they put it off for one month…which turns into two months…which turns into the whole year.
Skipping your payroll altogether is a red flag for the IRS and could trigger an audit. While being audited is as terrifying as Cher’s driving, there’s another scary thing to consider: the IRS can set the amount of your salary.
Since the IRS taxes you on your employee earnings, the salary they choose would probably be higher than what you would choose yourself, costing you more and leaving you totally wiggin’.
Employer payroll taxes
As an S Corp, your business is also your employer and you’re required to pay FICA payroll taxes, which are 15.3 percent of an employee’s earnings.
Your company pays half (7.65 percent), and the other half (also 7.65 percent) is withheld from your paycheck.
In addition to FICA payroll taxes, your business also pays FUTA tax, which goes into your state’s unemployment program. FUTA tax is 6 percent of the first $7,000 paid to each employee, but most businesses receive a tax credit that brings the rate down to 0.6 percent.
While you would have paid the equivalent of FICA payroll taxes as a sole proprietor, remember that you have to pay these taxes every time you run payroll.
That means that your $3,500 payroll run has crept up to $3,788.75. If you’re used to withdrawing $3,000 from your bank account every month, the extra $788.75 is going to feel way harsh.
Payroll service fees
It’s unlikely you’re going to file your own payroll reports and taxes. Not only is it a Josh level PITA, but, if you make a mistake and underpay, you get hit with penalties.
Most S Corp owners opt to use a payroll provider, like Gusto, our fav, which takes care of your payroll taxes and file your federal and state reports.
While the time they save you is totally worth the cost, they come at a price, and you’ll have to factor that into your monthly budget.
You can expect to pay between $30-$90 for monthly payroll service.
Bookkeeping and accounting fees
As a sole proprietor, you can get away with a shoebox full of receipts being your financial tracking method.
But, as an S Corp that isn’t going to fly. S Corps are under more scrutiny from the IRS, so you need to be sure that you’re using a legit tracking method for your finances.
This means either hiring a bookkeeper, which can cost several hundred dollars a month or using digital accounting software like QuickBooks Online, which costs $20- $70 per month.
You may also want to consult with an accountant to be sure that you’re paying yourself a reasonable salary, setting up your bookkeeping correctly, and maximizing the tax benefits of an S Corp.
One meeting with an accountant could set you back several hundred dollars.
As a sole proprietor or LLC, you and your business are considered one from a tax standpoint. That means you only file one tax return, which makes tax time pretty painless.
As an S Corp, your business completes a corporate return, plus you still file a personal return. Not only do you have to pay for two tax returns, but most tax preparers charge more to prepare a corporate return.
It depends on where you live and your tax preparer, but I’ve had clients pay upwards of $1,500 for their S Corp and personal tax preparation.
Speaking of taxes, check out this article to learn about a few ways to save big on taxes.
Annual state registration fees
Depending on the state you live in, you may have to pay a yearly registration fee for your S Corp. Costs vary state to state but can range from $20 all the way up to $800.
Just because an S Corp costs a little bit more to maintain doesn’t mean they are a full-on Monet. The tax savings could outweigh the extra costs, and then some.
The key is making an informed decision for your business. That way, you can decide if you’re totally in or, in the wise words of Cher Horowitz declare, “Ugh- as if!”
Andi Smiles, small business financial consultant and coach, teaches rad business owners to take control of their finances so they can step into their personal power.
She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money. Andi’s core belief is that when business owners are engaged with their finances, their personal awareness around money deepens, creating more sustainable and authentic businesses. She loves helping business owners connect with and feel good about their finances- no matter how many dollars are in their bank account.