Hello, I'm Attorney Elizabeth Potts Weinstein. Today, we're discussing how to hire yourself as an employee of your S Corporation in California. This guide is specifically for business owners in California who have formed an LLC or a corporation that is taxed as an S corporation.

Why You Need to Hire Yourself

If you have an S Corporation, you cannot pay yourself solely through profit distributions. The IRS requires you to hire yourself as an employee and pay yourself a reasonable salary. This ensures that you comply with tax regulations, including Social Security and Medicare taxes.

Steps to Hire Yourself as an Employee

1. Form Your S Corporation

First, you need to have an S Corporation. This can be an LLC or a corporation that you elect to have taxed as an S corporation. You cannot elect S Corporation status for a sole proprietorship.

2. Obtain an EIN

Ensure you have an Employer Identification Number (EIN) from the IRS. This is required to file the S Corporation election and for payroll purposes.

3. Choose a Payroll Provider

Selecting a payroll provider is crucial. You can use a bookkeeper, accountant, or a payroll service. I personally recommend using a payroll service like Gusto, which simplifies the process and reduces the risk of errors.

4. Register as an Employer

In California, you need to register as an employer with the Employment Development Department (EDD) at edd.ca.gov. This registration provides you with an employer tax account number, which is necessary for payroll filings.

5. Determine Your Salary

The IRS requires that you pay yourself a reasonable salary. This means the salary should be comparable to what someone else would earn for the same job. Balance this with your business's profits. For example, if your business makes $300,000 a year, a salary of $10,000 is not reasonable. However, if the business only makes $10,000, then paying yourself that amount is reasonable.

6. Run Payroll Regularly

Set up a regular payroll schedule—monthly, bi-weekly, or weekly. Regular payroll ensures you are disciplined about paying yourself and handling taxes appropriately. Even if your income varies, maintain a consistent schedule and adjust the amounts as necessary.

Final Thoughts

Hiring yourself as an employee of your S Corporation involves several steps, but it’s essential for compliance with IRS regulations. Using a payroll service can help you avoid errors and stay on top of your filings.