Discussion:Oddball question re: salary paid to owner of S corporation
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Discussion Forum Index --> Basic Tax Questions --> Oddball question re: salary paid to owner of S corporation
Discussion Forum Index --> Tax Questions --> Oddball question re: salary paid to owner of S corporation
| 22 November 2007 | |
| Hi all.
When dealing with an S corp the owner of the business does have payroll taxes taken out on him/her on the amount of their 'salary'. My question is how are those remittances handled....per the standard IRS remittance procedures (and State) or are there special rules for those remittances? Thanks, Michael | |
Gilesinsight (talk|edits) said: | 22 November 2007 |
| Michael,
If the owner/shareholder is providing a service to the S corp, then there should be a salary paid with all payroll & related tax withheld and paid/reported normally on a quarterly basis. | |
| 22 November 2007 | |
| That's what I thought but I wanted to confirm it. I am working a client who wants to incorporate and is looking at an LLC or S corp. Given that he is a single member electrician who probably won't make much above what the IRS would allow as a reasonable salary, I don't see much incentive for the S corp right now. In fact, it is quite possible the business might lose money for a year or two so the required salary could end up bankrupting them. Plus, the accounting and management costs/hassles would negate any possible economic benefit for years.
If they make it big, they can convert to S corp later for the tax savings. Thanks again! Michael | |
TheTinCook (talk|edits) said: | 22 November 2007 |
| "Reasonable Compensation" takes into account the profitability and financial health of the company. You don't have to pay a salary so large that it will bankrupt the company. | |
| 22 November 2007 | |
| I think he needs at least a single member LLC (Scd C). Tell him to buy some insurance. | |
Johnhuddleston (talk|edits) said: | 22 November 2007 |
| If he is going to lose money, the LLC is fine. Then you will not need an extra tax return. Also, you don't have the basis limitations you have with an S Corp. In the future, you can just make the 2553 election on the LLC to create the S Corp.
John Huddleston http://huddlestontax.com | |
| 22 November 2007 | |
| Thanks all, you guys are the best.
TheTimCook, I haven't met with the guy yet so much of my information is supposition. However, I don't see that he has too big of a client base just yet. He just filed for his business license so unless he has been operating without one for some time, he can't be making much. The IRS requires that a salary be paid and if he is losing money and having trouble cash flowing that salary, then he could get into a situation where he is depleting his personal savings (if he even has any) to put the money into the business...so that he can pay himself a salary...and pay the payroll taxes. I just don't know at this point. I read some articles that said efforts were underway by the IRS to abolish the exemption on the FICA exemption on distributed profits of S corps for a couple reasons....1) Increased tax collections (this IS the government after all and 2) the number of people cheating is causing hardship on the IRS enforcement personnel. I am going to put all of this in an executive summary, and recommend an LLC. Any future benefit of an S corp (supposing he makes it big) will be negated presently in additional accounting costs, filing costs, and compliance. Since he can elect S later, it is LLC now. Happy Thanksgiving all, Michael | |
| 23 November 2007 | |
| Michael, just be careful not to suggest that an S corporation must pay a salary to its stockholder-employee if it doesn't have the funds to do so. A stockholder's distributive share of income from an S corporation must be treated as wages to the extent of reasonable compensation for the services the stockholder provides. However, there is no requirement that the corporation pay its owner a salary if it does not have net income (before the salary) with which to do so. See Rev Rul 74-44, 1974-1 CB 287 ; Radtke, Joseph v. U.S., (1990, CA7) 65 AFTR 2d 90-1155 , 895 F2d 1196 , 90-1 USTC ¶50113 , affg(1989, DC WI) 63 AFTR 2d 89-1469 , 712 F Supp 143 , 89-2 USTC ¶9466 . | |
