Originally Posted by JFGLN
Good points here. What's a reasonable salary? Maybe $35k. You save money on dividends taxed at a lower rate.
Thanks. I try to be helpful as I have time. I know there are a lot of people out there just starting out and many accountants don't want to bother with someone who won't turn into a long term client relationship.
Two more points based on what you said:
The only difference you pay between the dividends (distributions) from the S-Corp profits are the payroll taxes. Yes, this is a substantial savings of 15.3% of every dollar earned. But the profit of the business still flows to your 1040 whether you take it as W-2 wages or a distribution. I think you are confusing qualified dividend income with S-Corp earnings. The two are not the same.
Secondly, it is impossible to establish a reasonable salary for everyone on lawnsite. Though they are few, some companies on here have net profits in the hundreds of thousands or dollars. Some might not even gross $30,000. I think some guidelines to follow would include:
-A salary of at least as much as would be required to hire a manager who operated the business for you.
-A salary more than you pay your top employees.
Again, those are just baselines and are in no way tax advice. Someone living in podunk midwest America might be justified in paying themselves $30,000. Someone living in a Chicago would have a hard time justifying that salary. There have been court cases which can serve as a general guide, but there is nothing set in stone.
It is my opinion that IRS will eventually do away with this tax savings opportunity. Too much incentive to cheat. And boy do people want to cheat! No one likes paying taxes, but someone has to pay something in order for our country to operate in a similar fashion as it has in the past.