Question about S Corp salary vs profit (no medicare/ss tax) and deductions

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CodeMaster
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Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by CodeMaster » Mon Dec 02, 2019 5:32 pm

Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
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unclescrooge
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by unclescrooge » Mon Dec 02, 2019 5:39 pm

Can I can piggy back on your question to ask a related question?

What if your S-corp held $25k in municipal bonds and generated $600 in income, is that still considered tax free?

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Wiggums
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Wiggums » Mon Dec 02, 2019 5:46 pm

CodeMaster wrote:
Mon Dec 02, 2019 5:32 pm
Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
How to Figure a Reasonable Salary

What does "reasonable" mean?

To find a reasonable salary for an S corporation owner/employee, consider how you would find a reasonable salary amount for any new employee. The IRS guidelines suggest you look at the following factors to determine "reasonable" salaries for your corporate officers:

Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation
Last edited by Wiggums on Mon Dec 02, 2019 5:51 pm, edited 1 time in total.

Topic Author
CodeMaster
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by CodeMaster » Mon Dec 02, 2019 5:49 pm

unclescrooge wrote:
Mon Dec 02, 2019 5:39 pm
Can I can piggy back on your question to ask a related question?

What if your S-corp held $25k in municipal bonds and generated $600 in income, is that still considered tax free?
Awesome question, I never knew of the concept of buying bonds for benefit. Whats the general idea? Say you have 25k in your scorp bank that came from sales or something. Then you could buy bonds under the CORPS name? What does that do exactly? Does it allow the 25k to not be taxed or tax deferred?
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markfaix
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by markfaix » Mon Dec 02, 2019 5:52 pm

CodeMaster wrote:
Mon Dec 02, 2019 5:32 pm
Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
Not a CPA, but am an S corp owner.

Yes, assuming the salary is reasonable, your 50k salary is subject to FICA; 450k is taxable to you without FICA whether you keep it in s corp acct or distribute to you the owner.

Muni income or bond interest is passed through to the s corp owner and reported on the k-1. INterest retains tax-free or taxable status.

What is "reasonable" salary is based on what you'd pay someone with your qualifications to work as an employee. The ratio matters less than what is typical. For example, if you were a physician, 50k salary and 450k distributions would probably not fly.

Probably best to talk with a CPA. Stephen Nelson in Seattle does S corp consultations. Not affiliated with him, but recommend it for ?'s.

Seas
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Seas » Mon Dec 02, 2019 5:58 pm

I think salary of $150K would fly

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CodeMaster
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by CodeMaster » Mon Dec 02, 2019 6:12 pm

markfaix wrote:
Mon Dec 02, 2019 5:52 pm
CodeMaster wrote:
Mon Dec 02, 2019 5:32 pm
Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
Not a CPA, but am an S corp owner.

Yes, assuming the salary is reasonable, your 50k salary is subject to FICA; 450k is taxable to you without FICA whether you keep it in s corp acct or distribute to you the owner.

Muni income or bond interest is passed through to the s corp owner and reported on the k-1. INterest retains tax-free or taxable status.

What is "reasonable" salary is based on what you'd pay someone with your qualifications to work as an employee. The ratio matters less than what is typical. For example, if you were a physician, 50k salary and 450k distributions would probably not fly.

Probably best to talk with a CPA. Stephen Nelson in Seattle does S corp consultations. Not affiliated with him, but recommend it for ?'s.
Regarding muni income or bond , is it purchased using your corps name and EIN? Is that amount still taxed end of year, then it grows tax free interest? Is the main benefit the tax free interest?
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Elysium
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Elysium » Mon Dec 02, 2019 6:42 pm

CodeMaster wrote:
Mon Dec 02, 2019 5:32 pm
Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
You have a CPA for your taxes, perhaps you can raise this question with them? almost everyone who is filing corporate taxes, even S-Corp, needs the help of a CPA.

That said, I am an s-corp owner and I can tell you that taking $50k salary when you have $500k income is surely going to invite IRS to come after you. This is exactly the type of behavior they do not want to see from s-corp owners. I am not saying you are doing this, but be aware that reasonable means it has to have some relation with how much income you are generating, especially if all of those income is based purely on your professional services skills, such as a Doctor, Lawyer, Accountant, IT, etc. You can determine what is a reasonable pay for someone with your skills and experience in the industry you are in, it has to pass the common sense test, that's all.

Spirit Rider
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Spirit Rider » Mon Dec 02, 2019 7:12 pm

Seas wrote:
Mon Dec 02, 2019 5:58 pm
I think salary of $150K would fly
Based on what???

Gone are the days when someone primarily providing personal services can pay themselves a minority of their profits as wages. This is current IRS guidance S Corporation Compensation and Medical Insurance Issues

The three major sources are:
  • Services of of shareholder
  • Services of non-shareholder employees or
  • Capital and equipment
To the extent gross receipts are generated by services of non-shareholder employees and capital and equipment, payments to the shareholder would properly be treated as non-wage distributions that are not subject to employment taxes.

But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.


By default, in a single employee S-Corp providing only personal services. It is presumed that 100% of the ordinary business income should be classified as wages. The burden is on the S-Corp 2% shareholder-employee to justify a lower salary.

The court decisions over the last decade have mostly focused on what an employee with your knowledge, skills an experience would receive as a salary in your COL area. Then that salary must be increased to reflect your managerial, marketing, administrative and financial roles.

Even if you are not a specified service trade or business (SSTB). The recent qualified business income (QBI) 20% deduction penalizes low single employee S-Corps with low percentage salaries eligible for the QBI deduction.

Everyone focuses on the phase-out of the QBI deduction based on taxable income of SSTBs. The same phase-out threshold (2019 MFJ = $321,400) is a phase-in of the W-2 wage limitation. This limits your QBI to 50% of your W-2 wages. This penalizes a single employee S-Corp with wages that are not 2X distributions.

It is crazy for high income S-Corps to be so focused on minimizing salary when after the maximum SS threshold they are only paying 2.9% FICA and maybe the ACA additional 0.9% Medicare surtax.

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JonnyDVM
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by JonnyDVM » Mon Dec 02, 2019 9:07 pm

Doctors and other white collars with small businesses aren’t eligible for the QBI deduction. If you don’t make or sell a widget QBI doesn’t help you. 3% FICA savings adds up when you’re talking about hundreds of thousands of dollars. If $9000 was sitting on the sidewalk would you bend over and pick it up? If you have an S-Corp grossing that kind of revenue you really need a CPA to help you file taxes and determine what is a reasonable salary. It is an area that is very gray. 50k on 500k would be hard to justify regardless of the work. There are many people who claim $0 salary and take all profit as a distribution. That is a very bad idea.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

krb
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by krb » Mon Dec 02, 2019 10:10 pm

I agree with all of the above. These are questions you really need to ask your CPA. I would also want to make sure that you are maximizing your retirement benefits. If you are grossing that much you should certainly have a defined benefit plan which will allow you to sock away let’s say $200,000 per year.

Spirit Rider
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Spirit Rider » Mon Dec 02, 2019 10:24 pm

JonnyDVM wrote:
Mon Dec 02, 2019 9:07 pm
Doctors and other white collars with small businesses aren’t eligible for the QBI deduction.
Only individuals with specified service trades or businesses (SSTBs) are phased-out of the QBI deduction in 2019 at $421,400 (MFJ) and $210,700. There are many physician families that fully eligible for the QBI deduction. There are even more SSTBs will lower incomes who are fully eligible

My points were. If you are a single employee SSTB, the majority of your business profits usually need to be paid out as wages due to IRS guidance ou are a single employee non-SSTB with taxable income above QBI thresholds. You need your wages to be 2X your distributions. Still, the majority of your business profits need to be paid as wages.

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unclescrooge
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by unclescrooge » Tue Dec 03, 2019 2:52 am

CodeMaster wrote:
Mon Dec 02, 2019 6:12 pm
markfaix wrote:
Mon Dec 02, 2019 5:52 pm
CodeMaster wrote:
Mon Dec 02, 2019 5:32 pm
Say hypothetically I have 500k in one year in my scorp bank account. Say I pay myself 50k salary. Would the rest be considered profit with no medicare/social security tax applied to it basically but still taxed as income?

I understand you have to pay yourself a "resaonable" salary, if 50k was reasonable, would it be ok to take the rest as profit? Ive heard the general best do 60% of total to go to salary and 40% to go to profit is generally shown to be more ok in past? Is that about true and good guideline to follow? If so, I would have to pay myself more salary even if its more then "reasonable" for a specific field?

Also, is there anything else I can do other then make business spendings / expenses to tax deduct so I can bring the total 500k tax down?

Truly appreciate the tips and hope to pay you back someday! :sharebeer :beer
Not a CPA, but am an S corp owner.

Yes, assuming the salary is reasonable, your 50k salary is subject to FICA; 450k is taxable to you without FICA whether you keep it in s corp acct or distribute to you the owner.

Muni income or bond interest is passed through to the s corp owner and reported on the k-1. INterest retains tax-free or taxable status.

What is "reasonable" salary is based on what you'd pay someone with your qualifications to work as an employee. The ratio matters less than what is typical. For example, if you were a physician, 50k salary and 450k distributions would probably not fly.

Probably best to talk with a CPA. Stephen Nelson in Seattle does S corp consultations. Not affiliated with him, but recommend it for ?'s.
Regarding muni income or bond , is it purchased using your corps name and EIN? Is that amount still taxed end of year, then it grows tax free interest? Is the main benefit the tax free interest?
Some businesses have a requirement of maintaining a certain level of liquidity. So these funds would be invested by the s-corp using it's EIN.

I was wondering if keeping that money in munies would retain the tax-free status, it would the income be taxed at the individual level.

Spirit Rider
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Re: Question about S Corp salary vs profit (no medicare/ss tax) and deductions

Post by Spirit Rider » Tue Dec 03, 2019 8:56 am

It is important to understand that an S-Corp is a pass-thru tax entity. It makes no difference when the 2% shareholder-employee's share of profits are actually distributed. There is little benefit to retain more in S-Corp accounts than is minimally necessary for operational considerations.

Without a specific facts and circumstance justification from the OP on non-shareholder-employees, capital investment, sale of products, comparative salary etc... It is likely that the OP needs to pay reasonable compensation of 1/2 -> 2/3 of business profits.

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