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Subject:  Re: Self-employed S-corp owners Date:  8/6/2003  8:25 AM
Author:  TheBadger Number:  7965 of 15018

Hello Hook:

As you stated, an "S" corporation is a pass-through entity (meaning unto itself, it does not usually pay any income tax at the federal level; though some states do modestly tax "S" corps at the state level.

IF, and I presume this to be true by the context of your post, you also happen to provide personal services to the "S" corp and the "S" corp is profitable, the you must treat yourself as an employee of the "S" and pay yourself a wage.

The central question is not IF but how much? Admittedly this area is grey in that you are wearing two hats at the same time: employee and owner. The owner is entitled to receive a fair return on assets invested and taking the risk of being in business; the employee is entitled to receive a fair wage for services provided.

Recognizing that pass-through income is cheaper (no SE taxes) the first place to look is what comparable people are being paid for similar tasks in your locale. As an example, if you are a carpenter & carpenters make $50,000 then this should become a target wage for you. If your "S" happens to make $100,000 before your wage then it is perfectly fine to declare $50k as wage and $50k as pass-through income to the owner --- also you. In short, this becomes an issue of reasonablility based on the facts & circumstances.

The best plan is to study the issue a bit and reach a reasoned conclusion & document the solution in your corporate minutes.


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