"Brandon Hall" <brandonh.hall[at]gmail.com> wrote:

- quote -

No. There would be no deduction at the corporate level
unless the salaries are paid in cash within the first two
and a half months (IIRC) of the next year.

An S corporation does not have to pay salaries if it does
not have the income to do so. It should pay salaries to the
extent it can, more or less to each individual depending on
the relative value of that individual's services to the
corporation.

Katie in San Diego
The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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- quote -

There is no requirement that an S corporation (or any
business, for that matter) to pay salaries to its owners if
cash flow is insufficient to do that. Where problems arise
is when the owners take funds out of the business as income
distributions without considering salary.

I suggest that unpaid owner's salaries be kept track of "off
the books." When there is enough cash to pay salaries, do it
then.

Maintaining books for an S corporation requires
understanding how they operate, which isn't always
intuitive. Get a professional to help you set up the books
properly.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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Brandon Hall wrote:

- quote -

You need to let us know here if (1) the shareholders work
in the business, and (2) whether or not the corporation
before salaries is profitable.

ChEAr$,
Harlan Lunsford, EA n LA

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"Christopher Green" <cj.green[at]att.net> wrote:
- quote -

[snip]

- quote -

I'm involved in an S corp with someone else. Currently the
company doesn't have enough money to pay "adequate
salaries". Since it's the end of the year, I'm trying to
figure out how best to close the books. Is it best to have
the company "owe" the owners as a liability on the books
instead?

-- Brandon

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"Wayne Brasch" <waynebrasch[at]stowetel.com> wrote:
- quote -

The entity in question is an s-corp. I think the poster is
bring up the issue of reasonable salary, not disguised
dividends.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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gerardtindale[at]yahoo.com says...

- quote -

Think about it this way. If you were working for somebody
else, wouldn't you want to get paid? You have spoken to a
few accountants and none of them took your position.
Shouldn't that be a signal to you?

You must pay yourself a reasonable salary. Otherwise, the
IRS may disallow some of the dividends.

Another problem you may have is treating the instructors as
subcontractors. If they work for you at times and places you
set, then they are most likely employees.

Gary

--
You can probably X figure out X which letters to X delete to derive my
email address X.

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- quote -

Just because the paperwork is a pain doesn't mean you can
skip it. From what I was told based on relatively new and
stricter guidelines for S corps, you need to be an employee.

Carol
It's a cats world. I'm just here to open the cans.

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"Gerald" <gerardtindale[at]yahoo.com> wrote:

- quote -

I'll let others argue the salary vs. dividend question but
assuming you are going to have to pay some salary and you
truly don't like the paperwork hassle, then hire yourself
through a temp agency and let them take care of all the tax
reporting and paperwork. Call several of them and you might
find a pretty reasonable markup. Estimate that they will
have to add the 7.65% for SS and Medicare, 3-5% for State
Unemployment, .7% Fed unemployment, 1-3% Workers comp (for
office type job) plus any local or special taxes.

Don't forget to stash some of what's left over in an IRA or
Roth. -bill

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gerardtindale[at]yahoo.com (Gerald) wrote:

- quote -

Whether they should be paid as EMPLOYEES (W-2) or
Independent Contractors (1099-MISC) cannot be determined
from the information you have given. Perhaps you should read
the IRS guidelines in Pub 15A, and make an informed
decision. If you control the work hours, course syllabus,
equipment, etc then they likely are your employees and you
should be paying salary -- alone with withholding of income
tax, SS and Medicare. Along with your own contributions to
SS and MC.

- quote -

Regardless of your shareholder involvement, everyone who
does work for the corporation must be paid a reasonable
salary for his/her services. Just because you dislike the
paperwork is no excuse for shortcutting the system. You will
issue yourself a W-2 at the end of the year, showing
withholding for income tax, and SS and Medicare withholding.

S-Corps do not pay dividends, per se. Net profits are
distributed to the shareholders and taxed accordingly. This
is done through the corporate K-1 form (1120 K-1).

- quote -

Listen to them.

- quote -

No, and yes there is a law.

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gerardtindale[at]yahoo.com (Gerald) wrote:

- quote -

There are numerous Tax Court and other judicial decisions
holding that an S corporation shareholder who performs
services for the corporation must be paid a salary (subject
to Social Security, Medicare, and other employment taxes at
both the employer and employee levels) commensurate with the
value of the services performed. A recent example is
Veterinary Surgical Consultants P.C., 117 TC 141,
10/15/2001.

An S corporation does not pay dividends, unless it has
earnings and profits that were accumulated at a time when it
was a Subchapter C corporation. The S corporation's net
income, after deducting expenses including your salary,
flows through to your individual income tax return and is
taxable at the end of the S corporation's taxable year
(which is probably the same as your taxable year).

The corporation's net earnings may be distributed to you in
cash or retained by the corporation; there is no income tax
effect either way. You have already paid the income tax on
that income, or will pay it on your current year income tax
return, whether it is distributed or not. The tax
difference between treating a dollar of S corporation income
as salary or a distribution is in the employment taxes
applicable to the salary.

You don't necessarily have to take all of the corporation's
net income (before deducting your salary) out as salary.
Income earned from the use of tangible or intangible assets
it owns or from services performed by others (e.g.,
employees or independent contractors) is not required to be
paid to you as salary. However, the corporation must pay
you reasonable compensation (salary) for the services you do
perform, as long as it has the capability to do so.

Your company may have even greater exposure with respect to
your instructors. It may be liable for employment taxes and
significant penalties if the IRS determines that they are
employees rather than independent contractors. A list of
characteristics that determine employee vs. independent
contractor status is at
http://www.irs.gov/taxtopics/tc762.html.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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gerardtindale[at]yahoo.com (Gerald) wrote:

- quote -

Whether you can lawfully treat them as subcontractors
depends on the facts of your relationship, not necessarily
on how you would like to treat them. IRS looks at 20
well-known factors for determining whether there is an
employer-employee relationship: see Rev. Rul. 87-41, which
is summarized on many Web sites; one of the better summaries
is at
http://www.vanblk.com/articles/Emplo...ontractor.html

It would not be unusual for trade-school instructors to be
independent contractors; it would also not be unusual for
them to be employees. In general, the more you control the
conditions of work, the more likely your instructors will be
found to be employees.

You can be hit with assessments that could exceed 40% of
labor expenses for the past three years if the IRS can make
a case that you intentionally misclassified your
instructors. A not-unusual outcome of such a case is the
demise of the business.

- quote -

It would have been prudent to consider that before
organizing as a corporation.

An S corporation owner who works in the business must be an
employee, must pay himself a reasonable salary for his own
labor, and must pay over payroll taxes and withholding.

[snip]

- quote -

Not taking an adequate salary from an S corporation is a
well-known cheat. You would be inviting a great deal of
trouble by following your proposed course.

--
Chris Green

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gerardtindale[at]yahoo.com (Gerald) writes:

- quote -

An S Corporation must pay reasonable compensation (subject
to employment taxes) to shareholder-employee(s) in return
for the services that the employee provides to the
corporation, before a non-wage distributions may be made to
that shareholder-employee. This issue has been identified
as an area of non-compliance and will receive greater
scrutiny in the foreseeable future.

Unlike a partnership, flow-through income from an S
corporation is not subject to self-employment tax (Revenue
Ruling 59-221, 1959-1C.B. 22). In direct contrast, a
partnership=E2=80=99s flow-through ordinary income is
generally subject to self-employment tax. On the surface,
this appears to be a clear tax advantage of an S corporation
vs. a partnership. However, in terms of
"shareholder-employees" of an S corporation, the analysis
does not end here.

If a shareholder-employee of an S corporation provides
services to that S corporation, then reasonable compensation
(subject to employment taxes) generally needs to be paid in
return before any non-wage distributions may be made to that
shareholder-employee. Several court cases support the
authority of the IRS to reclassify other forms of payments
made to the shareholder-employee as a wage expense. See
Joly v Comm. 2000-1 USTC 503 15 (6th Cir., 2000). In
addition, several court cases have reinforced and clarified
the IRS position as to the employee status of S corporation
shareholders who perform services for the S corporation.
See Veterinary Surgical Consultants, PC v. Commissioner, 117
T.C. 141 (2001) and Joseph M. Grey Public Accountant, P.C.
vs. Commissioner, 119 T.C. No. 5, (Sept. 16, 2002).

Provided an S corporation shareholder is an employee and has
received an actual distribution, the only remaining area of
question is what amount is considered "reasonable" for that
particular shareholder-employee. Whether the amount paid
for the services provided constitute "reasonable
compensation" is based upon all the relevant facts and
circumstances.=20

Additional Resources

Headliner Volume 32 (PDF) - http://www.irs.gov/pub/irs-utl/vol32.pdf
Drop In Article (PDF) - http://www.irs.gov/pub/irs-utl/vol32_dropin.pdf

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=3D

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"Gerald" <gerardtindale[at]yahoo.com> wrote:

- quote -

You can pay yourself dividends, but the downside to that
idea is the fact that dividends are taxable to you
personally as income but are not deductible by the
corporation. On your personal return, you will need to show
the dividend income from the corporation plus the profit
from the S corporation, if any. If you pay yourself a
salary, the corporation can deduct this as an expense and
you will show it as income on your personal return.

Wayne Brasch, CPA, M. S. Taxation

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I have a business that teaches adults how to use computers.
All my instructors are subcontractors. They get paid a gross
salary and I give them a 1099 at the end of the year. They
are responsible for paying their own taxes.

I am the only other worker at the business (I do
administrative work) and I am also the company's (S-corp)
100% owner. I want to know if I can pay myself from the
company in divident distributions or must I register as an
employee and pay myself a salary with medicare, SS, etc.,
withheld. I hate doing that because the paperwork is a pain.

My way of thinking is if I pay myself dividend distributions
then on April 16th I'll pay tax on that income at one time
in one large wad. A few accountants I spoke to said the IRS
doesn't like that, because they want me and the business to
pay small portions throughout the year and divide the
witholdings into SS and Medicare and Federal withholding.
They said I can pay myself in distributions BUT the IRS
wants to see me with a reasonable salary too.

So can I just pay dividents to myself or is there a law that
says I must pay salary too?

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