Salary to myself (tax-related question)

[Martin Pauly]

I just switched my business from a sole proprietorship to an S-corporation, mostly to protect personal assets in case something goes badly wrong. I'm currently doing this on the side; the overall sales volume is still pretty low, but the trend is promising.

Here's the problem: as an S-coporation, I understand I must set up a payroll system and pay myself a salary. As my CPA explained, the salary must be, at a minimum, typical of what is paid for the type of work and in the geographic area. If the IRS feels that the salary is too low, they would suspect that I'm trying to get around paying the necessary withholdings to the government, because then it would just be profit to the corporation (and flow over to the owner of the S-corp). As opposed to a C-corporation, where the IRS would be very happy to see me pay a $1 yearly salary.

Here's my dilemma: Starting out, I am limited by sales volume and cash flow concerns, so I cannot pay myself a big salary. At the same time, I want to comply with the IRS tax rules. I asked my CPA what a reasonable salary might be, and he said he didn't know, because it depends on so many factors, including things specific to our business of video, so he suggested to try to collect some data from people that are doing similar things.

If there's anyone here who's had to answer this same question before, I'd very much appreciate some guidance.

Thanks,
Martin

[George Kroonder]

Just put you business manager "thinking cap" on and think about how much you would have to pay someone else to do your (base) "job". Define it, for instance, as a self-directing cameraman (or whatever mostly covers the tasks you do). Look or ask around for references if you need some sense of "scale".

Answer you own "help wanted" add and do some hard negotiating with yourself ;)

As you do this "on the side" you actually don't have a full time job so a fractional "part time" salary is appropriate. Take the hours you spend on producing your work and maybe a little extra for admin/accounting (if you must). Tally time spent and use this for payrolling and you should be fine.

You don't need to take into account every hour you spend thinking (or talking) about your (new) business.

George/

P.S. The IRS is reasonable, but this works best if you have supporting documents (acurate timesheets, etc.)

[Jason Robinson]

Also don't forget that reasonable business expenses exist. Like cameras, lenses, tape, etc and that these count off against business income. It isn't a good idea to drive all income to expenses, but some is necessary.

Also don't forget that when the S-Corp pays you (the director / CEO) that the S-Corp will need to send in 14.5% in Social security payments. As a Board member / officer, you are not eligible for unemployment if you get fired (because you are a director / board member) so you do not (check with an accountant) need to carry Unemployment insurance. But you will need to file quarterly income reports, even if that amount is "$0" because you have not taken a payment from the company.

Once you get to this level, there are mountains of paperwork, unfortunately. This is what kills small businesses, especially once that get a little fancy with the paperwork and go the s-corp route instead of LLC / Sole Proprietor.

[Daniel Browning]

Originally Posted by Martin Pauly

I asked my CPA what a reasonable salary might be, and he said he didn't know, because it depends on so many factors, including things specific to our business of video, so he suggested to try to collect some data from people that are doing similar things.

There are companies that sell salary data by job description, many times you can get the reports for free. Job web sites have that kind of data, too. You can research job offers, salary requirements.

Record the final job description (and supporting research documents) in your books. In an audit, that will be your support to claim the salary. You can use the form of meeting minutes of the board of directors if it's for a CEO salary.

[Matthew Rogers]

I also ran into the same problem recently. We (my wife who owns 50% of the company) figured that $20,000 a year was a reasonable salary. That's what I was making at a video production company before, and since I am doing the exact same thing it seems reasonable. Of course, if you figure out $ per hour I actually work, I am getting $30+ an hour (so the IRS REALLY can't complain!) The key is to keep your salary big enough not to be questioned, that way you can draw the rest of the money from the company as a dividend--that way you only have to pay tax on it, not any FICA.

Matthew

[Jason Robinson]

Originally Posted by Matthew Rogers

I also ran into the same problem recently. We (my wife who owns 50% of the company) figured that $20,000 a year was a reasonable salary. That's what I was making at a video production company before, and since I am doing the exact same thing it seems reasonable. Of course, if you figure out $ per hour I actually work, I am getting $30+ an hour (so the IRS REALLY can't complain!) The key is to keep your salary big enough not to be questioned, that way you can draw the rest of the money from the company as a dividend--that way you only have to pay tax on it, not any FICA.

Matthew

Keep in mind that dividend income might not count towards Social Security, though if you are actually paying yourself $20K / yr then you meet the minimums as long as you pay that out with at least ~$2K in every quarter. That will get you the Social Security credit (not that I think SS will be solvent 30 years from now, but who knows).

[Don Donatello]

off hand ...
did you consider a LLC ? ...
if you did ... why did you choose S-corp over LLC ?

[Daniel Browning]

Originally Posted by Don Donatello

Why did you choose S-corp over LLC ?

For the tax advantage.

[Jason Robinson]

Originally Posted by Daniel Browning

For the tax advantage.

Neither one has a "double tax" that a standard c-corp does, but why I choose an s-Corp is because an s-corp can pay for medical expenses of employees. Since I was a full time contract software developer and part time videographer and since my wife also was self employed part time, we had to buy our own insurance any way. So we drove health expenses through the s-Corp and had s-corp reimburse for our individually purchased health plan.

pain the in butt for paperwork though.

[Don Donatello]

"For the tax advantage."

off hand - what tax advantage ?

under a LLC you can file $$ as pass thru to you or you can file like a corporation ... every tax year you have the choice to switch - whatever works out best for you for that year ....

[Jason Robinson]

Originally Posted by Don Donatello

"For the tax advantage."

off hand - what tax advantage ?

under a LLC you can file $$ as pass thru to you or you can file like a corporation ... every tax year you have the choice to switch - whatever works out best for you for that year ....

some expenses can be reimbursed with a s-corp that cannot with an LLC. Both should offer a liability shell (not ultimate protection, but a good first step). Finer points may vary by state.

[Yi Fong Yu]

easy, get quotes for jobs that you do from other people or have "spies" do it. that's what u should pay yourself =P.