how much to pay in wages and how much to take as profit

[huggytree]

im a LLC and file as an S-Corp

my first year i paid myself journeyman wages and took the rest as profit..

my 2nd,3rd year my accountant switched to 50 percent wages and 50 percent profit (my gross increased alot)

its now my 4th year-now that im making 2x what i did the first year im wondering if i should still count my wages as 50 percent...my wages are now double what a journeyman makes using his 50/50 formula....it just seems a bit crazy to me...im trying to lower my SS/Medicare....why does my profit have to be 50 percent max? I only work 1500 hours in the field, so i dont get why i cant pay myself 2,000 hours worth of journeyman wages and take the rest as profit...

just wondering if my accountant is being too conservative?

[Business Attorney]

I'm not in a position to comment on the dollar figure itself, but keep in mind that you perform a lot more services for your business than a journeyman plumber would. You are the CEO, the chief financial officer, the chief marketing officer, the top salesman, the head of purchasing and in charge of bidding, among your various jobs. The journeyman plumber would simply do the job you dish out to him and then go home to his wife and kids.

The "reasonable compensation" test will apply to ALL the jobs you do, not just being a journeyman plumber.

[Evan]

I agree with David. That includes the time you spend doing the administrative tasks of billing, following up on deadbeats, scheduling, advertising, etc.

I do not know the numbers either, nor do I need to. But generally speaking, it seems like he is trying to minimize the likelihood of you encountering an audit. If you don't think he is being aggressive enough, you can find a preparer who will, or perhaps this accountant will if you talk to him.

If your tax position is too aggressive, and you end up being audited -- remember that you'll be footing the bill. So instead of taking a salary of saying $80,000 and you paid yourself $60,000 -- is the $3,060 you saved in taxes going to really make a difference? It won't when you get his bill for the time worked in the audit, potentially, plus all the interest and penalties you'd be subjected to potentially.

Also, keep in mind that while social security and medicare are taxes, it's not like they don't benefit you directly. By having additional contributions to social security and medicare, you increase the amount of money you may be eligible for in retirement. Don't blast me with the politics of these taxes either, as I'm sticking strictly to the purpose of these programs. If you think they're _______________, contact your Congressman, not your accountant.

[huggytree]

is there a $ amount that would bring the percentage down to 40percent wages 60 percent profit?

the majority of my work is in the field as a journeyman....maybe 10-15 hours a week in the office...its getting close to those 10-15 hours equaling in wages to my 30-40 hours a week as a journeyman plumber....it just seems to be getting excessive on wages..

thanks for your comments...i may talk with another accountant just for the heck of it

[Evan]

If you want to justify it, start keeping a time log for a few months, or at least a year. Summarize your time down based on your activity -- either as a journeyman, or administrative. Don't fudge the numbers either, but honestly see how the numbers fall... you can probably summarize all your hours in a year based on a journeyman wage of X dollars, and administrative at Y dollars. Maybe it will be comparable.

There is no steadfast rule that wages/distributions should be 50/50. If wages aren't reasonable, ALL distributions may be reclassified as wages. If wages ARE reasonable, the IRS may be more lenient in the event of an audit.

If your line of work was actually seasonal, and you operated say May to September, then there is an expectation that your wages may be slightly lower as you only work during that period of time. While you may get spikes during certain time of the year, your general line of business isn't seasonal. Unless say, you ONLY worked on frozen pipes, or something.

[huggytree]

Thanks...i like that idea.

i keep track of my Journeyman time already, but i dont keep track of office time

i may seperate it into 3 catagories....journeyman, bidding/meetings, office work (quickbooks, ordering fixtures)

office time should only pay $15 per hour

bidding & meetings should pay full journeyman wage

im going to discuss this w/ my accountant...since ive never actually kept track of office time it may suprise me how much or little i do...its typically 1-1.5 hours a day

if i can keep track of all my wages and put a 'standard' hourly rate to the 3 tasks i dont see how that wouldnt be a fair wage.

[OldJack]

I have never seen a tax reference for a percent to allocating salary and profit. I don't believe one exists and the accountant is just playing it safe.
If you take no cash payments or asset distributions of any kind during a year you are not required to take a salary regardless of profit. This because the IRS only has the authority to reclassify payments taken as salary.

[Evan]

Oh my, OldJack! Welcome back to the forum!

[OldJack]

Hi Evan! Don't look like a lot of tax posts at this time of the year.

[Evan]

Generally not this time of the year... but as you know, they'll be coming!