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.