Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev Thread | Next Thread
Author: spongebrain One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Mandatory W2 from my S-Corp ? Date: 9/6/2000 10:03 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
This past year, I started a one man S-corp that has billed approx 200k in revenues this year. I have not drawn a salary from this corp since I have very little living expenses and have lived off previous savings. I will not need to touch any cash accumulated in the corp for several years.

My accountant has suggested that this can be viewed as evading paying self-employement tax, and that we should W2 myself, and draw a salary. This would incur substantial self-employement and unemployment taxes (approx $15k) He also has stated that there is no concrete rule that he can find saying if mandatory salary levels for an S-Corp exist. This seems hazy and gray, at best.

Since I do not currently need the salary, I'd perfer leave it in the corporations account. There is also a business case for leaving it in the corporation. I plan to take on additional employees in the future, and would need a substantial cash base buffer to do this (salaries, benefits, etc).

On the other hand, drawing a W2 salary could allow me to participate in a SEP, whose tax benefits (a $22k deduction) could offset the costs of W2'ing myself.

Any thoughts?
Thanks!
Print the post Back To Top
Author: EGUSC Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39607 of 121219
Subject: Re: Mandatory W2 from my S-Corp ? Date: 9/6/2000 12:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Your accountant is giving good advice. It is an audit issue that will most likely be raised by the IRS, if you are unlucky enough to be audited. There are a couple court case that the IRS has won in this area. If you do not claim a W-2 salary and are audited the IRS could claim 100% of the S corp earnings should have been salary and subject to employment taxes. If the taxpayer claim no salary, the courts have ruled that the taxpayer lost the right to argue againist the IRS salary adjustment because no salary is clearly unreasonable.

Good luck

Eg

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39610 of 121219
Subject: Re: Mandatory W2 from my S-Corp ? Date: 9/6/2000 1:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I'll agree that you're getting good advice from your accountant. It's really a gray area, but taking no W-2 salary is just asking for trouble. Most accountants I talk to agree that taking some salary will likely ward off problems in an audit, but I've never talked to anyone who has actually addressed the issue.

The usual figure tossed out is $30K - $40K in salary. You don't need to take the whole income as salary. Look at what you might pay someone to do what you are doing as an employee. That might give a starting place for your thinking about salary.

--Peter

Print the post Back To Top
Author: criser Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39611 of 121219
Subject: Re: Mandatory W2 from my S-Corp ? Date: 9/6/2000 1:14 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Be glad you've got a conscientious accountant. Take a reasonable salary. If the business is a personal service business that salary might be more than you wish it were, but you have to do the right thing. You don't have to do any more than that, but you're accountant is giving you good advice, if that's what you're wondering about.

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39629 of 121219
Subject: Re: Mandatory W2 from my S-Corp ? Date: 9/6/2000 7:40 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
<<My accountant has suggested that this can be viewed as evading paying self-employement tax, and that we should W2 myself, and draw a salary. This would incur substantial self-employement and unemployment taxes (approx $15k) He also has stated that there is no concrete rule that he can find saying if mandatory salary levels for an S-Corp exist. This seems hazy and gray, at best.>>

Not that you need any additional confirmation, but I'm on the side of your accountant. And I'll also second the notions that you should be very thankful that you have an accountant that's up on the issues and relates them to you.

As pointed out, the IRS is closely looking for one person S-corps that report no W-2 wages. It's impossible to defend the fact that if you are WORKING in order to generate revenue for the corporation that you wouldn't take a reasonable salary. If you disagree, please come to work for MY corporation...for nothing!!!

So it's a dead bang winner for the IRS. The only problem is the definition of "reasonable". If you get nabbed by the IRS, they'll want to make it as high as possible. If, instead, you take some W-2 income out of the corporation, you might be able to justify something between $30k and $40k.

TMF Taxes
Roy


Print the post Back To Top
Author: donk23 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39642 of 121219
Subject: Re: Mandatory W2 from my S-Corp ? Date: 9/6/2000 10:41 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
This past year, I started a one man S-corp that has billed approx 200k in revenues this year. I have not drawn a salary from this corp since I have very little living expenses and have lived off previous savings. I will not need to touch any cash accumulated in the corp for several years.

My accountant has suggested that this can be viewed as evading paying self-employement tax, and that we should W2 myself, and draw a salary. This would incur substantial self-employement and unemployment taxes (approx $15k) He also has stated that there is no concrete rule that he can find saying if mandatory salary levels for an S-Corp exist. This seems hazy and gray, at best.


Your accountant may be right about this. Even so, you can protect yourself to a certain extent against an adverse IRS position by maintaining in your corporate minutes a plan documenting the need to scrimp and save everywhere possible in order to build a cash reserve for a) contingencies and b) new marketing plans, product plans, expansion plans, etc. It will also help to document a salary at the lower end of the range for your services and include a plan to defer part of that compensation until certain events happen. Of course, you can't deduct the expense for the deferred part until its actually paid. The idea is to document what your salary ought to be but also that the company isn't able to pay it because of its cash needs.

Another possible tack is to document a compensation plan that calls for a very low salary plus a significant bonus (together totalling more than "typical" compensation) and specify very aggressive goals that must be met in order for the bonus to be awarded.

Implementing any of these ideas does entail some risk. You need to decide how aggressive you want to be. Keep in mind that it is not uncommon for owner-employees of small companies to do exactly what you're trying to do in the early stages. I've done it several times including during a period of three years where I was audited every year. You decide.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev Thread | Next Thread
Advertisement