Discussion:S Corp Owner Salary vs. Distributions

What we can get away with? That's probably a little less than what I really feel in my heart is reasonable compensation because I can make some pretty good arguments.

Do we file whatever the client does. I have clients that pay 0-10% of profits in salary. Yes, they are playing the lottery audit game, but the problem is they are winning 99 in 100 times. I heard an revenue agent say that they really don't audit companies under $100,000 (He did not say revenue, profit before salary or profit after salary). I've got one right now that paid $0 salary and $40,000 distribution. Obviously salary should have been paid, but all 941s company W-2s, etc. have already been filed. If I changed distributions to salary where would I even make up the numbers (IRS's job). File as client did the books? He is starting salary now in 2005 per my advice but I'm still looking at his 2004 return (yes it is after the deadline) wondering how I could file an honest return with $0 salary or how to make up any other #s (I also feel that is wrong). What if he paid $6,000 instead of $0. We know $6,000 is unreasonable, but that is the paper trail.

Thoughts.

Do you know why we are then given an option on the pass through K1 (on the individual tax return) screen to enter self employment income, under other info (17): That section alone was part of the reason that I believed that we were able to choice the option of paying SE taxes on K1 income,as this entry generated an SE tax calculation for the taxpayer..Have I then been mis-using this option?

But my question is: Are distributions treated as income in the current year? And if so, are they then taxed at the same rate as income?

Thanks

I do have a client who has taken salary all year but has not made any payroll tax payments nor filed payroll tax returns for the current year. He also has no money to pay any taxes, so my suggestion to him is to close the corporation..it has only been in existence since August and he is not doing anything to be compliant. What are your thoughts on this? As well, his father has a corporation and has been paying his son a fee each week (which should have been treated as salary to the son's corporation) for work he is performing for him. His father takes salary and makes payroll tax deposits for himself, but in case the son closes his corp and does not pay any payroll taxes, would this expose the father to payroll taxes for the son? The son is basically a subcontractor, but it could be argued that he is an employee??

My question is – can he issue 1099 instead of W-2 as Director Compensation subject to SS, that way the S Corp will not pay SS and he will not pay because he already reached the cap…am I missing something?

I appreciate the help.

I currently work for an employer at $58.00 per year w-2. I have an offer of $60.00 on a 1099 basis. I am wondering that if my comapny makes the $60.00 per hour and I paymeself a reasonable salary such as $30-$35 an hour. Will making this move make financial sense? I am also hoping to be able to take advantage of other advantages of having an s-corp.

I know you are busy but I have that potential client awaiting my answer and I am unclear on the correct direction. Assistance is greatly appreciated.

David

For example, I have a ticket broker client that grosses $400K/year. He manages and operates the business, with 2 employees. We used a salary of $65K and distributions of $100K because $65K is what he paid himself per year before he incorporated, so he has history. In addition, for the duties that he performs as office manager, $65K would be a very reasonable salary.

Again, never had an audit, but I would be comfortable making this argument to an IRS auditor.

"As to the second, the rules require that if there is a note document for the excess, it will be treated as cap gain, 15% plus state tax. If no note, ordinary income, 28+% plus state. Big diff."

but on this thread you state that you don't have to pay the tax. just curious, thanks man.

The reason that I ask, is that I've started an s-corp and will be paying myself an hourly rate, but I really want to minimize the rate for SS tax purposes. $23/hr is what I've originally come up with as enough to get by on while retaining the rest as profit (perhaps to be distributed in later tax years).

thanks in advance

I would be the only employee of the S Corp and would not have any expenses for 2006. Additionally the S corp will only come into existence in Nov 2006.

I understand basis to be the amount of money I have put into the company. I understand the salary/disbursement relationship to a point. It seems more applicable to an established (& profitable) company. As start-up, I was living off savings in year one (but did pay out $12k in Dec '04). In year two (having run out of savings), I paid out to myself a bare minimum (no where near a reasonable hourly wage). The amount I paid myself is less than 1/2 of what I put in (basis) to date.

What is the most tax efficient way to define the money I have taken out of the company to pay my living expenses? Should I classify some of the capital put into the company as a loan, and thus some of the money was repayment of the loan? Can I claim a higher distbursment ratio as a start-up?

I need to minimize my tax exposure for the simple reason that I am out of money. What to do?

Thanks.

So, it is ok to have zero salary combined with disbursements if the company has shown a loss? That won't set off alarms w/ the irs and be the proverbial hog?

If this is the case, I have a related question. I set up health care thru my company, and have the company pay the premium. Given a company can deduct max 30% of health insurance and the remaining 70% has to show as employee compensation, should I list the 70% as a disbursement or as compensation?

Just to be sure in calculating repayments & losses in regards to basis. If I put in $100k at start-up, lost $30k and repayed myself $30k in year 1, my remaining basis would be $40k?

If I again lost $30k in yr 2, would I then be left with a $10k basis - & if so would any repayment over $10k have to be classified as either salary or capital gains?

Sorry if this is basic for your guys, but I am just trying to be sure of the fundamentals before I bring everything to an accountant.

Your basis assumptions are correct, although from what you are saying it is unlikely you will receive re[ayment in excess of basis without income.

Is there any benefit to posting a salary in my situation (new company w/ a 2 yr loss), or should I just take money out as repayment/disbursement until either the company is profitable, or I close it up?

Myself and my husband has S corportation in which he is acting as an independant consultant and I am the 100% shareholder. He is getting 1099misc for 40000 out of 80000 that we made in a year. Since I am working as a full time analyst in a corporation and not 100% actively participated in the business, I did not give any w2 to myself and thinking about distributing $40000 as dividend. Is there any other way that I can treat this amount? Can I retain part of this money and distribute only $20000 to my self as dividend?

I have always been very confused as to how to treat the checks my husband writes to himself. I apply them to the money owed by the company for the above mentioned expenses, and apply the difference to salary, figuring out the payroll type taxes from the difference amount. Earlier this year, I spoke to the IRS to get some clarification as to whether or not this money is considered salary or something else (an accountant we went to said we should treat as distributions). She said my husband was not considered an employed, changed it in our files and told me I did not have to file anymore 941's. I was quite pleased to hear this, but it just didnt seem right to me. After reading the above threads it seems I will have to go back and file these quarterly reports!?

My questions are: 1. If the company is only bringing in a small income, shouldnt his salary be proportional to the income? If he was working for an established design firm he would be making much more, but he is also an artist so divides his time between both the company and his art. 2. As the sole employee are we responsible for federal and state unemployment taxes? 3. Does the "salary" we pay to my husband have to come in some sort of normal, weekly/bi-weekly fashion verus the checks he writes when he needs it? 4. Whats the best way to go about paying my husband?

Thank you very much for your time.

Vicky: I don't believe that it's a K1 item. It goes on Sch. D of your 1040.

Regarding reimbursements, profit draws and salary... Since he pays himself so nominally can we call that money profit draw (I am assuming reimbursements is reimbursment for capital put into the company?) and just report it as personal income, bypassing the payroll taxes?

I really hate those quarterly filings, and the penalties I end up paying by filing late is seeming to offset the benefits of having the S-Corp.

Any reading material, websites, etc you could recommmend on how to correctly go about doing our books, salary, etc. would be most appreciated. I have been learning as I go along but would love to have a more definitve formulas and methods to attacking our business accounting. It is always a worry for me whether I am doing things correctly.

Thanks again!

Stout: They don't other than that the numbers are obviously smaller. If you only show 10k in profit for example, no one's going to get excited. Whether you can pass by the PR filings is a matter of how much profit is there, and if more than 10k or so (this is just talking out loud, no authority for that number)...then you need to address what a salary should be even for PT work. I agree, the filings are a pain, get some help, you spend more in penalties than it costs to do them! I charge 100/qtr for one-person PR filings...and Stout: I AM THE BOOK! Seriously, I don't know...I'd rather see you spend the money on a pro's help, even if it's infrequent so that you don't get a nasty surprise somewhere. Or stay here and read all the S threads. That'll tell you everything you want.

Before any profit can be taken from the business, there must be p/r. Your husband is an employee of the s corp, in if p/t. All p/r taxes must be paid.

You can take profit from the AAA acct if there is any. Since the prior years had a loss, the AAA a/c may still not have a profit.

You can't reimburse for capital. If there is a shareholder loan acct, you can get a reimbursement from that so long as the acct has a credit bal.

Reimbursement of expenses is fine if you keep expense reports and do it on a regular periodic basis.

If the s corp pays for se health ins, that must also be added to the w-2, without any w/h.

There are many issues here any a non prof can get into trouble.

You need professional help.

Income/Losses below are after salary, if pd. Distributions paid are after salary.

Client started bus in 2002:

2002, Net Loss ($10,000)$00 salary,$00 distributions

2003, Net Inc $20,000, $00 salary,, $00 distrib. (repaid loan to SH)

2004, Net Inc $87,000, $00 salary!! $26,000 distrib.

2005, Net Loss($6,000),$20,000salary, $41,000 distrib.

2006, Net Inc $5,000, $30,000 salary, $2k distrib.

They have NOT filed 1120S or 1040 since 2002!! (lucky me, that's my job!)

I have thought about filing 941's as follows:

2003 w/$5k in salary

2004 w/$10k in salary (as a warm up, new business, just starting to be profitable).

They just take the hit on late filing, late pmt penalties to avoid the $0 salary in 2004 and all the distrib being deemed salary, which I have heard could happen, but have not seen discussed here. I know $10,000 in salary may sound low, but I have to weigh the risk of a low salary, w/all the penalties on the late 941.

But, if they had no distrib in 2003 (they repaid loans to SH instead) and after reading all your great comments, I am starting to think it may not be necessary to file a (very late!!) 941 2003 and I could suggest a $15,000 salary in 2004 instead.

At least they haven't filed the returns yet! Thanks for your help & suggestions!

The company continues to be profitable in '07 and will begin making payments to owner/officers. So I'm looking for tax advantaged way to pay out, both the retained earnings now, and profits throughout '07, using 50/50 split to start.

Can the retained earnings be divided & assigned to owner equity accounts giving each $6500 in equity - and subsequently, can $5k be pulled out from owner equity account w/o tax liability? If not, how is this classified and what solution?

As for regular payments, the salary portion is obviously subject to payroll taxes & reporting, but what about the distributions? Does the corp have to withold/pay anything on those or just rite checks and report distributions at end of year? 1099-div?

I'm new to this so thanks for your patience and insight.

$15k of retained earnings in '06, reported on 1120s/K-1s. What is best way to pay it out now?

For future payments to owner/officers, at 50% salary/50% distribution (see the math), I understand salary subject to P/R withholding/reporting. Question is what about distributions?

JR1/Kevin - Using ratios is indeed a specious approach, albeit one used by many tax professionals. I realize the owner salary must be appropriate for job function and industry. In a scenario where SMBs have regular income and can draw a regular salary, the remaining profit as a distribution at year end is more obvious.

But what about a biz with sporadic work, i.e project related and/or part time w/out sound annual income projections? Should an owner be expected to draw a regular salary throughout the year and potentially end up w/no distributions, even though a distribution would be in order based on work done and level of profit? Or should the owner draw some distributions as well throughout the year based on the profit above and beyond the appropriate salary for each project?

Thanks, Lee

Regarding reasonable compensation - it is different for every S corporation, there is no rule of thumb. It is unlikely that a salary of the max FICA rate will be questioned. I use my gut, or the "smell test" and then look at the situation on a company by company basis. FYI localities must be looking at this too. I had an S corp owner take no salary on company with a loss and take a distribution of 5,000 (clearly prior year profits & to pay parior year taxes!), and the locality wanted to know why she didn't take a salary. OYVEH!

"Johnny" Edwards 1998 tax return (PDF file, $360,000 salary, $5 million S corp profit distrib):

http://www.taxhistory.org/thp/presreturns.nsf/Returns/C7CBBC2B133D704585256F08004F5E7F/$file/edwards98.pdf

http://www.rothcpa.com/archives/000873.php - CPA article discussing the same.

im a S corp and wondering what to do: i didnt take a salary for 2006 and profit for the company was $29K

gross sales were $240K

if i put 0 as the salary - that is true as i didnt pay any taxes. yet i may get audited.

if i put 10K as the salary - that isnt true unless i pay back SS taxes - how do i do that and is it worth to pay the late fees/penalties?

i see some people saying that i need to pay that as a bonus and pay all of it as salary - but i am too late to pay tax on it -

help :)

thanks ben

You have following options: 1. file late quarterly reports, and w-2 and pay late penalties, ss and unemployment taxes 2. Write yourself 1099-misc instead, and treat yourself a self-employed this year, pay ss tax. 3. Don’t receive any compensation and treat everything as a profit from your company. Don't pay ss and unemployment taxes. The correct way is the first option: you pay here ss and unemployment tax. To avoid penalties, you can choose the second option. You pay only ss tax If you have some other income, and already paid SS tax some place else, you probably can choose the 3rd option (if your business income is not significant). You don't pay ss and unemployment tax, but you might be questioned why you didn't pay.

Sandysea, I've pretty much confused myself as well. The S-Corp is DBA under another name. So I guess the S-Corp is paying us wages since we didn't need another EIN, according to the IRS. I thought there might be a way of paying SS and unemployment taxes without going through the W-2 filings. There won't be any Federal Income taxes due. Thanks.

Normal employee pay for my spouse's occupation is 300k per yr(I guess justification behind old group?). We are starting a new business and I established an S-Corp. So workload for 2007 is maybe equal to 8 months of regular employment. However, as a new business I expect only 400k. So 300k payroll and 100 K-1 seems we are disporportionately taking a bigger payroll tax hit than necessary.

So does 60/40=240k payroll and 160k seem appropriate or hopefully less payroll? Or maybe my thought is 300k/12month=25k per month x 8 months worklaod(new business)=200k payroll and 200k K-1.

Any suggestions?

I appreciate your comments. =-)

In this case, distributions play a key role...don't let distributions be an unreasonable amount versus salary :)

This would save: .029 Medicare FICA x 48,000 + .124 Social Security FICA x 48,000 = $7,344! This correct? Thanks.

W2 or 1099 for S Corp Shareholder

Anyway:

"Can BOTH Members/Shareholders file as 1099 Contractors"

With few exceptions, no they can not.

" should we treat distributions/payments out of the SCORP as Salary?"

It depends on what the meaning of reasonable compensation is.

btw, I think we will be responding on this thread if this board is still alive in the year 2010.

As for VEXED: It sounds to me that he left his job(employee non-owner) and struck out on his own. Need more facts.

You can choose to be taxed as a partnership, in which case you will get a guaranteed payment  and you will be responsible for all your p/r taxes.

Someday I will catalogue all the "IRS is getting ready to audit....." stories. Three or four years ago it was autos donated to charity for one, and see what happened? Both IRS and Congress changed the rules! This is often what happens; IRS promises more enforcement and Congress gives them tools. See JR's comments on Rangel's Tax Bill on another thread.

I have an S-Corp with 3 partners. Two of us work run the business full-time, while the 3rd is a 25% shareholder. He is basically an investor, or silent partner.

My problem is this:

All year, we have been unable to take salary because our business is new and we had a cashflow problem up to this point. Now, we are able to finally pay ourselves something, but I don't want to pay ourselves salary and have the payroll taxes taken out. My thinking is that our losses will be so great at the end of the year, that there must be a way to not have to pay the payroll taxes now.

Normally if we were equal partners, we could each take a dsitribution. The complication arises with the 3rd partner at 25%, and the other two at 37.5% each.

Is it possible to take a distribution and pay the two fulltime partners now, but not reduce our year end distribution? The two fulltime partners should be compensated for their day-to-day work, as was the reason for the salary in the first place. But to this point, was not payable due to cashflow reasons.

Am I making any sense? At all? ;-)

And no, you're not making complete sense because on one hand you talk about taking salaries, then that there'd be losses at year end, then about distributions. Where there are losses, there cannot be distributions. Whatever you do, if you take money out, you must pay reasonable salaries. If you don't want that, you're in the wrong kind of entity. After you pay salaries, whatever profit remains is split in accord with the ownership. Usually, folks working in the biz WANT a salary so that they're not compensating a silent partner for work that he didn't do. If you're scenario is a net loss, you could forego your salaries until next year, splitting up the loss by %, or you can go ahead and do salaries, and yes, the payroll taxes, increasing the loss which is then split. That loss would offset your income taxes, but not SS taxes.

Consult your accountant. Tricky choices.

Life is not fair. Compensation for services is wages. Compensation for ownership is distribution of profit. Tough thing that you have to pay payroll taxes, but that is life. Distributions get paid out of profits earned from the business, after reasonable wages have been paid to shareholder-employees.

S Corp Salary on Amended Return: http://www.taxalmanac.org/index.php/Discussion:S_Corp_Salary_On_Amended_Return

S-Corp 2% Shareholder-Employee "Reasonable Salary": http://www.taxalmanac.org/index.php/Discussion:S-Corp_2%25_Shareholder-Employee_%22Reasonable_Salary%22

S CORP OFFICER SALARY: http://www.taxalmanac.org/index.php/Discussion:S_CORP_OFFICER_SALARY

S-Corp (Salary pd to oneself): http://www.taxalmanac.org/index.php/Discussion:S-Corp_%28Salary_pd_to_oneself%29

S- corp with no payroll, salary or distributions: http://www.taxalmanac.org/index.php/Discussion:S-_corp_with_no_payroll%2C_salary_or_distributions

S Corp Officer did NOT take salary - big trouble? payroll?: http://www.taxalmanac.org/index.php/Discussion:S_Corp_Officer_did_NOT_take_salary_-_big_trouble%3F_payroll%3F

S Corp - loan repayment or payroll salary: http://www.taxalmanac.org/index.php/Discussion:S_Corp_-_loan_repayment_or_payroll_salary

S-Corp Owner Reasonable Salary payroll: http://www.taxalmanac.org/index.php/Discussion:S-Corp_Owner_Reasonable_Salary_payroll

S-Corp salary/draw or payroll: http://www.taxalmanac.org/index.php/Discussion:S-Corp_salary/draw_or_payroll

S-corp with no salary or payroll to sole shareholder: http://www.taxalmanac.org/index.php/Discussion:S-corp_with_no_salary_or_payroll_to_sole_shareholder

S-Corp that didn't pay payroll salary to officers: http://www.taxalmanac.org/index.php/Discussion:S-Corp_that_didn%27t_pay_payroll_salary_to_officers

S-CORP PAYROLL and salary: http://www.taxalmanac.org/index.php/Discussion:S-CORP_PAYROLL_and_salary

Business startup corp or llc? S Corp salary: http://www.taxalmanac.org/index.php/Discussion:Business_startup_corp_or_llc%3F_S_Corp_salary

SWEEET S Corp salary payroll compensation again: http://www.taxalmanac.org/index.php/Discussion:SWEEET_S_Corp_salary_payroll_compensation_again

S-Corp no salary or payroll during year: http://www.taxalmanac.org/index.php/Discussion:S-Corp_no_salary_or_payroll_during_year

The proverbial S Corp Distributions VS Salary: http://www.taxalmanac.org/index.php/Discussion:The_proverbial_S_Corp_Distributions_VS_Salary

S-Corp-Salary: file a (very) late 941 or issue a 1099?: http://www.taxalmanac.org/index.php/Discussion:S-Corp-Salary:_file_a_%28very%29_late_941_or_issue_a_1099%3F

S-Corp distribution vs payroll or salary: http://www.taxalmanac.org/index.php/Discussion:S-Corp_distribution_vs_payroll_or_salary

I am certain that a search using other terms than "salary s corp" would bring more hits. So do your homework before asking another question. And, better yet, after your homework is done and you still have a question, start a new thread rather than tacking it onto this one.

As such, all distributions will be appropriated to the %owners and subject to social security taxes. It is one of the new methods the IRS has adopted to collect more money for the government.

All I know is this is going to suck to have to explain it to the clients, if and when it does happen.

Corp is going to show about $40k in distributions after expenses ($10,000 to me & $30,000 to her on the corp K-1).

I was hoping to absorb her distribution with some real estate passive losses, but I have heard that husband & wife both have to be material participants if one is.

Thoughts ?

John Huddleston Seattle Bellevue Tax Accountant

It makes more sense if you go over the wage base. I'm concerned that it would pencil out in the end however. Salary does need to be reasonable at both ends. For a company that has before salary profit of $100,000 every year, a $1,000,000 bonus gets you to the point in one year where interest could be used to distribute all profit (assuming 10% interest). You would pay $29,000 extra SE tax in year one. After that, you would only have interest income ($100,000 per year). The problem is that the $1,000,000 salary would not be reasonable in that scenario.

John Huddleston Seattle Bellevue Tax Accountant

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” — Judge Learned Hand, writing for the 2nd Circuit Court of Appeals in Helvering v. Gregory , 69 F.2d 809 (1934)

John Huddleston Seattle Bellevue Tax Accountant

If a taxpayer takes the position of not taking all net income as salary in order to avoid SE tax, would it benefit that position in the eyes of the IRS if the taxpayer left the additional cash in the S Corp instead of taking a distribution? Say there is a taxpayer who doesn't need all the cash generated by his S Corp (owned solely by him), and he would like to invest the excess cash. Can he just leave the excess in the S Corp and have the S Corp invest it? Is there any rule about having more than one business purpose - i.e. both a trade and holding investments (S Corp was never a C Corp, so there is no E&P to cause tax on >25% passive income)? Could an S Corp which has a primary trade/business also purchase real estate as an investment?

Yeah, right. Won't work. If the corp has need for capital, leave it in the corp, pay the income tax (but no SE tax) to grow capital. Down the road, when it is time to sell or liquidate, take a modest bonus and pay the rest out as a tax free distribution of AAA.

John Huddleston Seattle Bellevue Tax Accountant

John Huddleston Seattle Bellevue Tax Accountant

My partner and I each have 50% share of ownership in a s-corp. I do not want to pay payroll taxes he does. Is it possible for me to sell my shares to a LLC to avoid the payroll taxes? Or do we have to convert the s-corp as a whole to receive the benefit of not paying the payroll taxes?

$ 58,000 after allocating $ 5,000 to retirement (I'm not contributing more because I'm saving to buy a house) and leaving $ 10,000 remaining in the S Corp bank account to cover monthly expenses. Would paying myself a $ 75,000 salary and a $ 58,000 distribution potentially cause issues with the IRS given the salary amount is fairly close to the distribution amount? What do people do in my position who are sole owners of S Corps, sole employees, want to clear out the S Corp bank account at year's end (leaving enough in the account to pay upcoming expenses) but to do so they'll need to give themselves a distribution that is close to, equal to or even higher than one's salary? I feel like I'm in a catch 22. Also, does the IRS frown on S Corp sole owners clearing out the S Corp bank account at year's end or do they prefer this? Obviously, I don't want to leave funds in the S Corp account that doesn't need to be there in order to keep the business running. I'd rather those funds be moved into my personal accounts, but this means my distribution is going to be high.

JR's last point is that once you have raised your wages to $75k, arguing that a lower amount is reasonable becomes problematic. If last year you worked for $75k and figured it was reasonable, why is a lesser amount reasonable this year?

Ultimately, if the IRS is going to chase S corps paying low wages, there are worse offenders out there than you who paid yourself $75k. So IMHO $75k wage, $58k distrib is not likely to significantly increase your audit chances. And, if the argument does get raised, Joan's point is relevant (if she and I are interpreting your post correctly) that the distribution you are contemplating taking for 2008 is the first one you've taken in five years, so naturally there is an accumulation all coming out in one year.

At some point you might think about taking earnings above your salary out into a corporate deductible pension, like a SEP. On a 50,000 salary, $12,500 could be contributed and deducted by your corporation for a SEP contribution.

If a sole owner provides a service, how can a reasonable salary be anything other that what the sole owner (S-Corp) netted? Just as if he were a Sole Prop instead of an S-Corp. How can the reasonable compensation be different for a service provider just because of the entity choice. If consultant makes 200K net, that's what he makes. How can you say that he provided 200K of service, yet the salary is only 75K and the rest is corporate profit when he is the corporation. The corporate product is the owner's knowledge in the service it provides. Revenue would be a direct function of his participation.

I can see how reasonable compensation would make sense for a sole owner (S-Corp) that instead sells a product. His product is widgets. If he profits 200K from selling widgets, I can see a 75K salary and a 125K distribution. The corporate product is the widget. Revenue from sales would not be a direct function of the owner's participation in the same respect.

And Cat, Jdugan as usual summed up my thoughts rather well.

It's just the fact that it's one guy making the money based on his services. It just doesn't make sense.

If it were a S Corp owner with a consulting firm and several employees that netted 200K, I can see his reasonable salary and the distributions. His distribution is the result of the sweat and toil of others. Now that's the capitilist way :)

I understand that the rules are different.

I just broke my one golden rule - "Know the rules, but do not ask yourself why or try to make sense of them". It should a commandment somewhere. I was trying to make sense of the tax code.

With a C corp, a salary can be deemed unreasonable if it is too high (in the eyes of the IRS). This is because the IRS wants the excess taken from a C corp as DIVIDENDS (not distributions); dividends are not deductible by the C corp, yet taxable to the individual - thus the double layer of taxation you may have heard about....

With an S corp, the IRS wants a 'reasonable' salary strictly to get payroll taxes (Social Security and Medicare cash flow into a failing system). I've never heard of the IRS determining that a salary in an S corp situation is TOO high (anyone else ever heard of it happening). Your personal income tax liability isn't changed by your S corp salary vs distribution (disregarding the impact of the payroll taxes paid by the S are deductible).

Hope I'm interpreting your questions correctly and that this helps.

Death&Taxes, it is a service business with significant expenses and very limited capital invested. I'm not in a position to take a nice chunk of earnings and allocate them towards a retirement fund because I'm in the process of buying a house and need as much personal income as I can.

Belle, understood. My concern is if my “reasonable” salary is $ 75,000, then to essentially clear out my S Corp bank account this would mean my distribution would be close to, equal to or perhaps higher than my salary (which the IRS doesn’t seem to like), and not being in a position to put funds into an SEP. Thus, I feel stuck in a position where my distribution is going to be on the high side over and above salary in most years and that’s what the IRS doesn’t like, but I don’t see any solution to it other than contribute to a SEP (not an option currently), so then that’s my quandary.

Any further suggestions/concerns per my posting directly above (my second posting of the day)?

I'm surprised to read how much can someone make from this type of solo enterprise....

Second, if you are trying to up your income to buy a house, I'm assuming you are trying to qualify for the mortgage, in which case the higher the salary, the better off you are. Unless the stress towards buying the house only pertains to having cash on hand rather than what income is going to show on the application.

Either way, Cat s/b fine.

$ 134,400/Total Expenses $ 123,500. Had I been paying myself a salary of 75K in '06, I wouldn't have made enough profits to meet that salary. Should my expenses run so high that I cannot meet the salary I set for myself this year (75K) in future years, what then? Thanks for you insight. I appreciate it!

D&T - why take the chance, since she has two days to get it done? ($75000 X 153% X 10% =

      $ 11,475 minimum with no FIT w/h)

1) Currently, I am working full-time at a firm and get paid a fixed salary and I have created my own S Corp where I work about 5 hours a week. How much should I pay myself for the S-Corp? Let's say that my S Corp makes about 100,000/year and I work only 5 hours/week.

2) Also, must I pay employement taxes or should I pay myself a salary if the company has not made any revenue yet? The S Corp has only been established.

As for the second comment, I work in a different area - services. The purpose of the new venture is to only buy and sell products.

I've just set up an SCorp where I'm the sole shareholder and employee. My question in regards to the "distribution of profits".

I keep reading where a distribution is "nontaxable". I thought the distribution was taxed and your regular tax rate (less SS & Medicare)? Also, whats the difference between a distribution of profits from the Corp. to me and a "draw"? Finally, where is this reported? I know the salary is reported on a W2, but where is the distribution (and/or draw) reported...1099, W2 also??

Thanks.

I corrected it - thanks JR

Thanks again.

Distributions are shown on line 16 of your k-1 but it stays there. It nots get transfered anywhere else.

S

You can still report Q4 salary. The 941 is not due until Jan 31. You can pay employment taxes at that time up to $2500 without a penalty for failing to deposit employment taxes. If you have zero income tax withholding, your salary can be over $16,000 and your total tax will be under $2500. That's much better than zero salary. You can also pay a management fee from your corp to you and issue a 1099. The fee will be subject to self employment taxes. It's better to pay a salary than use the management fee method. However, that is a way to get the IRS their employment taxes. An auditor may be forgiving if you explain the circumstances and that you are not trying to avoid tax.

John Huddleston Seattle Bellevue Tax Accountant