Should I pay myself Monthly, Quarterly, or Annually?
For IRS compliance reasons, officers of corporations including LLC entities that are taxed as an s-corp are generally required to pay themselves a reasonable wage annually. Preferably this would be paid prior or in conjunction to the officer receiving compensation as a shareholder. Each CPA may have a different take on the preferred frequency/schedule of officer compensation to be reporting on your W2; we encourage you to discuss the in's and out's of this with your CPA before making a decision on your payroll frequency.
We offer corporate officers three typical options for scheduling their payroll W2 payments each year: Monthly, Quarterly or Annually.
Monthly: By paying monthly, or in conjunction with the payment schedule of any additional employees, prevents those balloon tax expenses from accruing throughout the year and likely provides you with the most assurances in maintaining compliance with IRS rules for officers. However, paying monthly can be difficult for those with inconsistent cash flow or who anticipate a change in tax strategies for the new year. Ideally those paying monthly would be able to start the year with predetermined salary, tax and retirement deferral targets. Of course, paying monthly or on a regular schedule wouldn't prevent you from adjusting these targets later in the year if necessary or from adding a year end bonus to account for any unexpected gains. However, starting or stopping constantly during the year based on cash flow fluctuations should be avoided.
Quarterly: Those with steady, but slightly fluctuating cash flow timing might want to shoot to pay themselves quarterly. While your goals should continue to have started the year with salary, tax and retirement targets, this could allow you to schedule those amounts based on your cash flow throughout the year. One issue to avoid is delaying your retirement deferrals or Fed/State withholding until Q4 if your paying yourself a quarter of your salary in Q1-3. As an example, say you are over 50 and wish to max out your 401k plan by deferring the 2022 max of $27,000. If you don't spread the retirement deferrals out while you pay yourself a salary each quarter, you would need to pay yourself at least $29,236.60 in Q4 to avoid having to refile prior 941 returns. This is due to the 401k being a pretax deduction meaning it lowers your Federal & State taxable wages and we shouldn't report a negative wages on the 941 line 2.
Annually: We understand monthly or quarterly isn't for everyone. For those that need more time to tax plan or evaluate performance each year, we do offer annual schedules. For those that wish to process annually, we ask that this come at the request of your CPA for compliance recordkeeping purposes.
Please seek advice from your CPA when determining your schedule to fully understand any compliance implications as it relates to IRS parameters for owner compensation.