No. of Recommendations: 0
I'm starting a new S-corporation in a new state, and I'm having a hard time trying to figure out how I'm supposed to structure compensation to myself which is also "fairly" taxed.

An S-corporation has pass-through taxation, so on the one hand I was thinking that I could just pass through 100% and avoid W-2 and unemployment issues entirely. Of course I'd still have to split the pass through between "dividend" and "salary", with the latter eligible for both SS and SE tax. I'm fine with this, and it seems the simplest route to go.

The problem is, I'm not sure if it's legal. I can't seem to find a straight answer anywhere, and even the various tax professionals I've spoken to seem to have a hard time agreeing.

The second option is to go through the hoops of hiring myself as an employee, do the W2 withholding, register with the state DOL for unemployment and income tax withholding, etc. A crap load of effort for, well, not much money.

Does anyone have direct experience with this situation? I was hoping that huge gobs of S-corporation owners would have run into this, but so far I haven't been able to find much on the subject.

Thanks,

-Hook
Print the post Back To Top
No. of Recommendations: 0
I started my S-corporation 4 years ago, and started showing a profit after 2 years. As you know, the "profit" must be included as income in your personal tax return, which I am happy to do. I have myself as an an employee, use QuickBooks Payroll (the one where I prepare my own reports, etc.) and have fun. Yes, I do have to pay Unemployment to the state, but here in SC, that is terminated after the first $7,000 wages paid. I also set up a SEP-IRA. At the time this was set up, I could only contribute on behalf of the corporation for the benefit of me, as the employee, 15% of gross salary. Now it has increased, to, I believe, as much as 25%. Next year, I intend to increase my contribution to 20%.

I am sure an accountant could advise you on the "pass-through"; however, I am not sure that is legal.

Donna
Print the post Back To Top
No. of Recommendations: 1
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.

TheBadger
Print the post Back To Top
No. of Recommendations: 0
you must treat yourself as an employee of the "S" and pay yourself a wage.

Right, I understand the primary concern -- I can't dodge paying my SE/SS and income taxes by relying strictly on pass through income. The problem I'm facing is more procedural, which I should have been more explicit about.

The question then is: do I have to pay wages via W2/W3 reporting, or can the reasonable salary simply be paid as disbursement with the employee (me) responsible for SE/SS payment and income tax withholding? The latter _seems_ like it's easier, but maybe I'm painting W2/W4/I5, etc. etc. as being more complicated than it really is.

Quicken has a service called QuickPayroll which may be enough for me to get by with, but it's a subscription service which is rather annoying. I have a free trial here so I'll look into that.

-Hook
Print the post Back To Top
No. of Recommendations: 0
"Wages" have to be paid. And part of paying wages is the various wihtholdings and subsequent tax reporting such as 941's, 940's, state unemployment, W-2's etc. I recently had a client audited over this very issue. The rules are prety clear. Officers and/or others performing services for the corporation are "employees" and are compensated with wages.

Bob
Print the post Back To Top