Discussion:S Corp Owner Salary vs. Distributions
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| {{ForumReplyPost|UserID=Rgreen|Date=2 December 2005|Text=As far as all of the above comments, I am most closely alligned with DZCPA. I don't worry about 60/40 or whether the salary is greater than the distributions. I've never had one of my S Corps. audited, but the feedback I've heard from others is that the IRS has only really raised the issue when the stockholder takes ZERO salary (hogs get slaughtered).}} | {{ForumReplyPost|UserID=Rgreen|Date=2 December 2005|Text=As far as all of the above comments, I am most closely alligned with DZCPA. I don't worry about 60/40 or whether the salary is greater than the distributions. I've never had one of my S Corps. audited, but the feedback I've heard from others is that the IRS has only really raised the issue when the stockholder takes ZERO salary (hogs get slaughtered).}} | ||
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| + | {{ForumReplyPost|UserID=KLRJR16|Date=4 December 2005|Text=There are more considerations in deciding salary and distributions than i have seen mentioned here. I had a plumber take the salary of his highest paid person. ( $36000 ). He also had $100,000 in profit distributions. My arguement with the IRS was that his salary matched the averages in our region for plumbers and the profit was his dividend as a shareholder. I successfully argued that the other four employees also earned profits for the company. So the circumstances should dictate the salary/dividend decision. If owner is the only worker, it would be hard to argue large profit dividends.You need a rational approach to your decisions, not a standard "rule of thumb". You need to impress on the IRS agent that the shareholder and the company are separate entities and to look at their audit with this in mind. And always, smile, act nice, offer food and drink, and a comfortable working environment for the Auditor.}} | ||
Revision as of 14:10, 4 December 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. | |
| 25 November 2005 | |
| I do not agree with the distribution rule as noted above. Distributions have no relationship to the amount of time a shareholder spends on the business activity and how much hiring another person to do those tasks might costs. Making a high profit margin on income does not mean the shareholder should have a higher salary signing check or supervising employees. The IRS audits are so low that I do not spend much concern with whether the IRS will audit more returns in the future. I have only seen 3 audits last year out of 1,000 returns filed. Not much to worry about.I usually use a wage of $18 per hour times 2000 hours worked per year equaling $36,000 per year. We have never had a problem yet. | |
| 28 November 2005 | |
| Seems to be a broad grey area, but I think it will get more attention as the IRS has hired more people. It may be okay for no compensation at times, where the business has not yet been profitable or is a new business for the first year. I then suggest that the owners pay themselves at least what they would hire someone for similar work. As a check on your method, distributions really should have some relationship to capital invested or retained in the business. I think that a straight percentage (like 60/40) may not hold up. Some taxpayers choose to be more agressive than others, but my preference is to have a salary that is based on hours, reasonable rate of pay, and move it up slightly each year (unless business or amount of work decreases). Have your clients put a reason for salary in the annual minutes. That should help document the reason the pay rate was chosen. | |
| 2 December 2005 | |
| As far as all of the above comments, I am most closely alligned with DZCPA. I don't worry about 60/40 or whether the salary is greater than the distributions. I've never had one of my S Corps. audited, but the feedback I've heard from others is that the IRS has only really raised the issue when the stockholder takes ZERO salary (hogs get slaughtered). | |
| 4 December 2005 | |
| There are more considerations in deciding salary and distributions than i have seen mentioned here. I had a plumber take the salary of his highest paid person. ( $36000 ). He also had $100,000 in profit distributions. My arguement with the IRS was that his salary matched the averages in our region for plumbers and the profit was his dividend as a shareholder. I successfully argued that the other four employees also earned profits for the company. So the circumstances should dictate the salary/dividend decision. If owner is the only worker, it would be hard to argue large profit dividends.You need a rational approach to your decisions, not a standard "rule of thumb". You need to impress on the IRS agent that the shareholder and the company are separate entities and to look at their audit with this in mind. And always, smile, act nice, offer food and drink, and a comfortable working environment for the Auditor. | |
