Are You Paying Yourself Enough?

pay checkAs the owner of an S corporation, you’re probably aware that there’s a tax advantage to drawing money out of the corporation as a distribution rather than as wages. The reason is simple. Unlike wages, distributions you take out to the extent of basis in your corporate stock aren’t taxable.

Although you, as a shareholder-employee of an S corporation, have flexibility in choosing whether to receive salary payments or cash distributions, the discretion is not unlimited. The lRS can recharacterize distributions as wages if compensation isn’t reasonable. How much compensation is “reasonable”? There’s no simple formula, but in Publication 535, Business Expenses, the IRS lists several factors in determining reasonable compensation.

There are a number of concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable” and minimize the potential for IRS reclassification of distributions. As in most tax situations, planning ahead avoids problems later. Contact us if you’d like to discuss this or any other aspect of your compensation strategy.

About Padgett Team

Our firm is a leader in outstanding accounting, tax payroll and business services. Our dedication to the 3 dominating business requirements of Professionalism, Timeliness and Excellence dictate the day-to day service we provide equally to each client. No small business is too small.

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