PDA

View Full Version : Hi, new S-corp owner with owner salary question.



GrindStone
01-15-2010, 11:07 PM
Hello everyone,

First post. I just started an S-corp with 4 equal owners in Calif. I was trying to understand what S-corp owners pay themselves.

If I have it right when I take a salary the corp has to pay about 11.95% in Employer Taxes on top of the gross salary. But when Net Profit gets put into the owners' pocket at the end of the year it is not dinged the employer taxes, is this correct? How do owners work around or minimize the employer taxes? Do owners just live with the smallest salary possible for the year?

Thanks so much for helping a new owner out !!

Evan
01-16-2010, 05:09 PM
Hi GrindStone,

Welcome to S-B-F. Employment taxes, for federal purposes, is 15.3% -- composed of 7.65% social security/medicare, and the employer matches it (the S-Corp). The employer also pays federal unemployment taxes, in addition to a possible array of state taxes. I am not familiar with California taxes, so I will not claim I know, as I am on the opposite coast.

The net income of the business, taking into consideration the salary expenses, is what is distributed to the 4 equal shareholders -- 25% each. It is important for each shareholder who is an employee and performs services for the business be paid a reasonable salary for the services rendered. If you wouldn't pay someone else that amount to do the same services, it is probably unreasonable. So if you worked 500 hours in a year and take "wages" of approximately $1,000 -- that isn't reasonable. Nobody works for $2.00 an hour!

The bottom-line net income will be divided out 25% each for the shareholders. Distributions (similar to dividends) may be made, and it isn't subject to any additional income taxes, as income tax will already be paid on it.

The IRS requires reasonable shareholder-employees to take a reasonable salary, and may reclassify distributions as a salary if they find it is unreasonable. They are starting to crack down on this due to the abuse.

GrindStone
01-17-2010, 09:29 PM
Thanks Evan!

I have been researching since I posted and now I'm confused about learning that an S-corp owner employee must take a salary even if they are operating in the red. I can't wrap my brain around this logic, I hope I'm wrong. If I'm barely getting by without paying myself how can the gov. honestly tax what tiny savings I have in the bank by forcing owners to take a salary in the early stages of a s-corp. What if there is literally no money to take a reasonable salary yet? Shouldn't they want to support me to get off the ground and create jobs which I am, I have about 7 staff. The gov. should be thanking us small guys as we try a new venture and create jobs. Every penny is going to my staff and I can't afford to pay myself yet. And I read the penalty is 100% on missed employer tax, someone please help me understand! (sorry about the rant not meant to be political)

Evan
01-17-2010, 10:39 PM
You don't have to take a salary if you're in the red. But if you had net income of (for example) $100,000 -- it's not reasonable to pay yourself $1.00 an hour, and take the rest as a distribution to avoid payroll taxes. The IRS would reclassify any excessive distributions as wages.

Even if you did have $100,000 of net income, if you were planning on retaining some of your earnings to do some form of expansion -- that'd be fine too. As long as you aren't distributing it and trying to avoid payroll taxes. That's really the key.

In your case, you don't seem to be avoiding payroll taxes -- you just aren't there yet.

GrindStone
01-18-2010, 05:14 PM
Thanks again Evan !!

Ok that's good news, and it makes sense wow how often does that happen, haha !! :)

Evan
01-18-2010, 09:52 PM
It makes sense wow how often does that happen, haha !! :)

Not often enough! :) Good luck with your business.

ryanh
02-25-2010, 08:32 PM
Evan, to follow up on the question of salaries for an s-corp, if profits are minimal in the first year, and are not near enough to pay a salary to the single officer, how are those profits typically handled? Can they be retained by the s-corp? Small distributions to the shareholders?

Thanks!

Evan
02-26-2010, 08:29 PM
Just retain them. Whatever that small profit is will flow through to your personal tax return.

ryanh
03-01-2010, 09:45 AM
Just retain them. Whatever that small profit is will flow through to your personal tax return.

Hi Evan,

One last question from me on the topic. If you defer salaries because of insufficient profits, are these unpaid salaries considered deferred, and should be made-up in subsequent years when profits are sufficient?

Thanks!

Business Attorney
03-01-2010, 10:28 AM
Not really, at least not directly. The test for paying "reasonable compensation" isn't black and white, but is generally looked at year by year. The question is, given the totality of the circumstances (income, available cash, time & effort, comparable salaries, etc...) what is a reasonable salary each year.

Evan
03-01-2010, 07:41 PM
I agree, as usual, with David's remarks. :)

Business Attorney
03-01-2010, 09:49 PM
Sorry for horning in on your question, Evan.;)

Evan
03-02-2010, 11:25 PM
Hah! It's tax season, so you may be able to provide a quicker response. Not that you AREN'T busy. :)