Discussion:S Corp Owner Salary vs. Distributions
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| {{ForumReplyPost|UserID=LJACPA|Date=23 November 2005|Text=I just had an S Corp. s/h tell me yesterday that he was advised of the 60/40 'rule'. However, is this really a rule, per se, or just a oft-used recommendation?}} | {{ForumReplyPost|UserID=LJACPA|Date=23 November 2005|Text=I just had an S Corp. s/h tell me yesterday that he was advised of the 60/40 'rule'. However, is this really a rule, per se, or just a oft-used recommendation?}} | ||
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| + | {{ForumReplyPost|UserID=Mpfllc|Date=24 November 2005|Text=All of the above responses to remuneration for "S" corp owners are reasonable, however LJACPA has the real answer, in that salary should never be less than distributions. In years past IRS has overlooked this requirment in an "S" corporation, but are now beginning to take notice. One way to resolve this issue is to convert to an LLC which has no such remuneration requirement. Although I believe they will close that loophole one of these days. Have already had on audit of an "S" corp where the owner worked full time and the auditor allowed his salary to be substantially less than distributions, but only because it had been done that way for several years. I suspect they, IRS, do not want to face a precident setting issue just yet.}} | ||
Revision as of 19:58, 24 November 2005
Discussion Forum Index --> Tax Questions --> S Corp Owner Salary vs. Distributions
Cpasupport (talk|edits) said: | 16 November 2005 |
| We all have to decide at what level reasonable compensation is for S Corp owners. I've used industry averages, what employees are paid, corporate right to profit, IRS standard of living tables, etc. Anything I can to justify the lowest possible S Corp owner salary. I'd love to hear other peoples ideas. Sometimes I feel like I'm too aggressive when I'm listing $15k-$30k for salary for owners making 30k-$100k before salary and distributions, but what do we go with?
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.
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| 17 November 2005 | |
| If you are doing the tax return and they are doing their own payroll and bookkeeping, it would seem to me all you can do is highly suggest that they pay a reasonable salary. If there is no officer compensation, then that line on the 1120S must be zero. The IRS is looking at these lines and are starting to audit these returns. To put something there when there is none, is a big mistake. I certainly have clients that own corporations and their kids are the employees and run day to day operations. If the owner/officer does not physically work in the business, I have no problem with a zero salary. When they are working in the business, then they need to pay appropriatly. Look at the hours they work and wages paid to others. They certainly should not be the lowest paid employee of the business. The amount of the wages need to fit that facts (hours worked, going rate, ect..). | |
| 18 November 2005 | |
| One general guideline I always use is, never let the salary be less than the distributions. After that, it's anyones guess. | |
DianeOffutt (talk|edits) said: | 22 November 2005 |
| I advise clients of the 60/40 rule, 60 being salary. | |
| 23 November 2005 | |
| I just had an S Corp. s/h tell me yesterday that he was advised of the 60/40 'rule'. However, is this really a rule, per se, or just a oft-used recommendation? | |
| 24 November 2005 | |
| All of the above responses to remuneration for "S" corp owners are reasonable, however LJACPA has the real answer, in that salary should never be less than distributions. In years past IRS has overlooked this requirment in an "S" corporation, but are now beginning to take notice. One way to resolve this issue is to convert to an LLC which has no such remuneration requirement. Although I believe they will close that loophole one of these days. Have already had on audit of an "S" corp where the owner worked full time and the auditor allowed his salary to be substantially less than distributions, but only because it had been done that way for several years. I suspect they, IRS, do not want to face a precident setting issue just yet. | |
