We are hosting a two-hour class for new Practice Owners in February!
Come join us and learn about accounting, taxes and your numbers.
Does this sound like you?
If so you should check out our class page and sign up for the class.
If you have been following our series of posts about S-Corps, then you may be familiar with the phrase “reasonable salary.”
The IRS is particular about paying yourself a reasonable salary since your salary is subject to payroll taxes. There are a variety of ways to calculate your reasonable salary, and the IRS tends to work with a nine-factor test.
The factors are:
(1) Employee qualifications;
(2) The nature, extent, and scope of the employee’s work;
(3) The size and complexity of the business;
(4) Prevailing general economic conditions;
(5) The employee’s compensation as a percentage of gross and net income;
(6) The employee-shareholder’s compensation compared with distributions to shareholders;
(7) The employee-shareholder’s compensation compared with that to non-shareholder employees or paid in prior years;
(8) Prevailing rates of compensation for comparable positions in comparable concerns; and
(9) Comparison of compensation paid to a particular shareholder-employee in previous years where the corporation has a limited number of officers.
When we help clients with the above, we tend to ask a lot of questions and then document the process we follow. Documentation is key: if the IRS ever audits or reclassifies your distributions as salary, you need to have data to backup your numbers.
Based on the above factors, we discuss what your education and licensing level is, how your practice is set up, how your firm is doing, and the state of your financial data. Someone grossing $250,000 in their firm is going to be paid differently than someone grossing $75,000.
This, of course, goes back to the point that you need to be making enough money to make it worth electing to be an S-Corp.
Many private practice therapists who we’ve worked with have salaries ranging from $45,000 to $130,000, for example. Determining a reasonable salary depends on what is going on in your business and the factors involved in your business. A reasonable salary is not going to be the same across the board since every practice is different.
First…take a step back. While you might have someone already picked out for an open position in your practice, you need some lead time before you can hire someone in Washington State.
Do you already have a payroll system set up? If you’re an S-Corp, you should. If payroll is already established, the hiring process can often be a little quicker.
If not, then you will need to file a NEW business license application. When you apply, the purpose will be “hire employees.”
We recommend that you file for a new business license online since it is the quickest way to apply.
Now the wait begins. This is why I mentioned that there will be some wait time. You will need confirmation letters for workers’ compensation and unemployment insurance from the Department of Labor and Industries and the Employment Security Department.
Once you get the confirmation letters, you will need to setup your payroll. We recommend using Gusto (our affiliate link) for payroll. We can either help you set this up or you can purchase Gusto (or use another method) on your own. We do not recommend QBO Payroll, we have seen to many mistakes happen.
From here, you’ll need to get your new employee set up and on payroll. You will also need to make sure that you are following the various Minimum Wage Requirements and Labor Standards Act.
If you are an S-Corporation with a retirement plan, hiring employees can be a little more difficult if you have a retirement plan in place for yourself. We will discuss some of these topics in future blog posts.
TL;DR: Make sure you are set up for payroll before you hire someone. We recommend discussing this with a professional as messing payroll up is very easy. As always, we can help!
