New business, new tax concerns

Dear Tax Talk,
I'm an owner of an S corporation that I just started in Michigan. How do I know what to pay myself and my business partner? We are 50-50 owners. And do I have to pay taxes quarterly? -- Brian

Dear Brian,
In an S corporation, the owners that work the business must receive a reasonable compensation (payroll), according to Internal Revenue Service regulations. That's because an S corporation's earnings are not subject to self-employment tax so that if the corporation does not pay a salary, its owners would avoid payroll taxes. If the salary isn't reasonable then the owners would pay too little in payroll taxes.

Payroll taxes are due quarterly on Form 941 by the end of the month following the close of the calendar quarter. Payroll taxes withheld are subject to deposit if the total taxes withheld from salaries and the employer's matching taxes exceed $2,500 in the quarter. Taxes are deposited into the U.S. Treasury's account at your financial institution together with a federal tax deposit coupon Form 8109. You should have received a yellow coupon book from the IRS of customized Forms 8109 when you opened the company. Michigan also has payroll tax obligations that you should review with your accountant.

Once you start to make money, you need to set up a regular pay schedule, deposit taxes (if required) and file timely tax returns. You can find out more about your payroll-tax obligations by reading IRS Publication 15, also referred to as Circular E.