CLIENT KNOWLEDGE BASE

    S Corp Withholding

    Estimated taxes are quarterly payments that the IRS requires from taxpayers who expect to owe $1,000 or more when they file their return. In our opinion, the word "penalty" is a scare tactic because, statutorily, the calculation is interest (the short-term rate plus 3%). The IRS does not want you to borrow their money, so they charge you market interest for keeping it.

    For S Corp business owners, there is a unique strategy to build in flexibility while avoiding any interest (the "penalty") completely.

    The strategy allows S Corporation owners to avoid paying estimated taxes throughout the year without incurring penalties by adjusting the Federal Income Tax Withholding on the officer’s compensation (W-2) by December 31. This is because the IRS treats withholding as having been paid evenly throughout the year.

    Example - you make a W2 withholding deposit on 12/31 for $50,000.  The IRS views this as being made equally over 12 months! 

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      Do we recommend paying NO estimated taxes as an S Corp owner and using this strategy?

      No!  The purpose of this strategy is allow you some wiggle room and also stress relief that you can 100% avoid $1 in interest if you want to!

      Practical Example:

      For example - let's say your "Safe Harbor" estimated tax amount was $10,000 per quarter.  In conjunction with your Project Manager, you decide that you will pay $5,000 per quarter, meaning you have a shortfall of $20,000.

      You take the excess $5,000 per quarter and invest this into a high interest yield account, your business or the market and earn a 20% return.  On or around 12/31, you run your final S Corp payroll and you make up this difference.  Is the money still gone?  Yes - but you grew the money and kept the earnings vs giving it to the IRS all year, interest free!

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      Understand Your Tax Liability during our Meetings:

      Know your expected tax liability for the year. This can be done by estimating your S Corporation's profits and your share of them. 
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      Determine Required Annual Payment:

      To avoid an underpayment penalty, you generally have to make estimated tax payments that equal at least 90% of the tax for the current year or 100% (or 110% for high income) of the tax shown on the return for the prior year, whichever is smaller. 
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      Figure out Your Investment Strategy with the Amount you are Deferring

      If you are going to use this strategy, do not throw your money into a long term account that is not liquid!  You should grow your money in a relatively SAFE place in which you can liquidate if you need these funds to true up your W2 Withholdings by 12/31. 
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      Adjust W-2 Withholdings before 12/31 to account for the ES Tax Shortfall:

      Before December 31, calculate how much you would need to have withheld from your wages to meet the required annual payment (the safe harbor amount). Remember, this MUST go through payroll!  You cannot just make an estimated tax payment on 12/31.  The trick here is to ensure the tax payment runs through the W2 withholdings system. 
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      The Big Picture:

      The big picture is to understand you have a LOT of flexibility with Estimated Taxes as an S Corporation owner.  We can 100% avoid estimated tax "penalties" or interest with this strategy and allow you freedom with your cash during the year, if you choose to invest it elsewhere. 
    If you still have a question, we’re here to help. Contact us