Many S-Corporation owners take little or no salary so they can take out their profits as a dividend, which are not subject to the 15.3% self employment tax. The IRS has stepped up their audit of these plans and has been winning in the courts.
In a recent case, a CPA took a $24,000 salary in a year when his share of the firm’s profits was around $200,000. A district court agreed with the IRS and reclassified the dividends as a salary subject to payroll (Watson, D.C., Iowa). Of course they also owned penalties and interest.
So the moral of the story – Pigs get fat; but, hogs get slaughtered! It’s alright to be a little “piggish” and take some of your profits as a dividend. But, don’t be a “hog”!
So what is a fair salary? Well that is an individual fact situation that depends on many things. How much of the work does the owner do? What equipment is used by the business to produce a profit? How many employees does the business have? What would the business have to pay in order to replace the owner?
Call me at (915-857-8158) or email me (wayne@wjb-cpa.com) if you need help establishing a fair salary that will pass IRS muster.
PS- Another good tax blog to check out is WWW.taxgirl.com.
Like any good CPA, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.