Originally Posted by ajwired
This may be a dumb question so please forgive me. If my accountant is recording income on my personal tax return using a schedule e (my company is an s-corp), then why does it matter so much what I assign as my w-2 salary as an employee of that company?
s corp shareholders receiving a Sch K-1 must report the amounts on IRS Form 1040 Sch E; however, S-Corp is pass-through, which means that profits from the business are passed along to the owner as ordinary income and taxed at their marginal tax bracket. As shareholder-employees receive both wages and profits from the S-Corp, there is a strong temptation to pay a lower salary and a higher profit distribution. Wages are subject to FICA payroll taxes. The S-Corp will pay the employer's share of FICA taxes 7.65%, and the employee will pay the other share of FICA taxes ,also 7.65%. Between the S-Corp and the shareholder, wages are subject to a combined 15.3% payroll tax, plus the shareholder's income tax rate. Profit distributions, however, are not subject to FICA payroll taxes; they are subject only to the shareholder's income tax rate. So all things considered, the shareholder-employee will have a strong preference to pay herself a minimal salary and thereby increase the profit distribution."