Dan Posted January 10, 2009 Report Share Posted January 10, 2009 If you are the owner of a small S Corporation and when you began the corporation the S-Corp paid you around $200 a week in wages. You thought this would be a reasonable wage. It seems that over the years after all the deductions are taken out there is not much left in order to take a distribution. You have only been able to take 1 or 2 distributions ($200 total or $400 total) per year. My question: How does the IRS fill about lowering the $200 a week in wages to say $175 a week so that you can get more distributions per year? How about lowering the wage to $150 per week? Is this a red flag to the IRS? When the S-Corp was formed, the thought was that more money would be generated. Look for your answers!!!! Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 10, 2009 Report Share Posted January 10, 2009 There is no easy or correct answer based on the information provided. S-corp officer wages could depend upon several factors considering the work and labor involved. I would first consider the question is this a service business a 100% service business provided the customer by the S-corp officer? If so 100% of the annual earnings could be considered taxable as wages. On the other hand, the officer shareholder has a right to "expect" a reasonable profit from his investment of capital in the corporation and as such has a right to fire or set the wages of all employees including himself. Note that if there are zero payments of any kind to a working shareholder the IRS has no authority to force a wage to be paid to the officer. The IRS only has authority to reclassify S-corp payments as officer wages. Why would we care how the IRS feels. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 10, 2009 Report Share Posted January 10, 2009 I'd probably cut the wage in half if the company was not giving me any profits. OldJack said it well. Quote Link to comment Share on other sites More sharing options...
Dan Posted January 10, 2009 Author Report Share Posted January 10, 2009 Thanks for responding!! I was wondering if you could lower the wages and pay more in distributions. Quote Link to comment Share on other sites More sharing options...
jainen Posted January 10, 2009 Report Share Posted January 10, 2009 >>I'd probably cut the wage in half if the company was not giving me any profits.<< While I have no personal argument with this line of thinking, I can't help observing that industry in general does not share it. I wouldn't exactly call it a red flag, but judging from the daily news don't you think it sounds odd for a corporate executive's compensation to go down if his company doesn't do well? Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 10, 2009 Report Share Posted January 10, 2009 If you lowered the salary for any other employee, would he remain with you for long? Still be productive? Do you have a business reason for lowering your own salary? If you do something for tax reasons only and not for a business reason... Quote Link to comment Share on other sites More sharing options...
David1980 Posted January 10, 2009 Report Share Posted January 10, 2009 If you lowered the salary for any other employee, would he remain with you for long? Still be productive? Do you have a business reason for lowering your own salary? If you do something for tax reasons only and not for a business reason... Well, that would depend. At one of my former jobs when things got tight the boss changed the schedule so that instead of working 40 hours a week we ended up working just 4 days each or 32 hours a week. Made the same rate per hour, but it resulted in lower paychecks. So one question I guess you could ask is with the company being less profitable is it taking less of the owners time as well? Quote Link to comment Share on other sites More sharing options...
Bart Posted January 11, 2009 Report Share Posted January 11, 2009 If you lowered the salary for any other employee, would he remain with you for long? Still be productive? Do you have a business reason for lowering your own salary? If you do something for tax reasons only and not for a business reason... I have a client who has had a downturn in business(who hasn't?). The employees voted to take a 10% reduction in pay instead of two of them losing their jobs. I do like and agree with your line of thinking. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 12, 2009 Report Share Posted January 12, 2009 But, he's not lowering his salary to save someone's job or to save the company, he wants to take a lower salary so he can take higher distributions. I realize that he has a strong personal reason for doing that, but does he have a business reason? If his only reason is tax avoidance, do you want to sign that return? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 12, 2009 Report Share Posted January 12, 2009 It's hardly unreasonable to cut his salary if the business is not making enough to justify the original amount. And yes, it happens to employees too, that they get faced with 'You can take a cut in pay or you can look for a new job.' That is especially reasonable for an owner/employee. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 13, 2009 Report Share Posted January 13, 2009 But the OP asked about cutting salary in order to take MORE in distributions while taking the same overall. He just wants to distribute it differently. In other words, he has no business purpose for lowering his salary while simultaneously increasing his distributions. It's just tax avoidance. The company is not doing worse. Salaries in his field in his region have not dropped. What would he get paid for performing similar duties as an employee in a company in which he is not a shareholder? That would be a reason to reduce or increase his salary. If avoiding SE tax is the only reason he can give an auditor, you might want to suggest he research salaries to document a business reason for his change. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 13, 2009 Report Share Posted January 13, 2009 Well... some of those distributions might be justified as earnings/profits from prior years that had not yet paid-out. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 14, 2009 Report Share Posted January 14, 2009 He can take all the distributions he wants from previously taxed earnings. But, does that justify lowering his salary? Wouldn't his salary be based on what he does for the company? If that hasn't changed and if the total amount he's going to end up with doesn't change, as much as he'd like less salary and more distributions, he hasn't given me a business reason to reduce his salary. He wasn't looking to justify taking distributions, he was looking to justify lowering his salary while taking more distributions. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 14, 2009 Report Share Posted January 14, 2009 Well, since an investor/owner would normally expect that he would get BOTH a salary and some reasonable ROI, if the business turns out not to allow for that level of salary AND a reasonable ROI, I would consider it a business reason to adjust to allow at least some of each. And the IRS routinely does approve such decisions. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 14, 2009 Report Share Posted January 14, 2009 >>he hasn't given me a business reason to reduce his salary<< Would a performance review showing dissatisfaction with his decisions and lack of company profits work for you? Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 14, 2009 Report Share Posted January 14, 2009 I love the idea of a performance review! That's a great document to keep in his files to support his salary reduction. His company does have profits, just not as great as he'd hoped; but it sounds like they've been the same all through the years. So, he might have to manufacture a document to cling to to support his lowered salary. My small business owners don't really invest much in their companies, very undercapitalized, so ROI wouldn't get them much. Like your guy, they expect to take out more than they earn without driving the company into the ground. But, my barber said my company can buy me a car, pay my mortgage on my home office, give me a travel allowance and spending money.... Quote Link to comment Share on other sites More sharing options...
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