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Old 01-16-2007, 04:46 PM
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Reasonable Salary for an S Corporation

Dear TaxGuru,

My CPA says this is a subjective matter and that even the IRS is not sure what this amount should be. If that is the case, why should I bother to even take a salary in my 'S' Corporation...I would avoid paying any payroll taxes and save all the aggravation related to payroll filing requirements, workmans compensation issues etc..

Can please give me your opinion on the Salary for an S corporation.

Your opinion would be valuable.



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Old 01-16-2007, 09:14 PM
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Dear cstatham,

This is a complex subject and our profession has difficulty coming up a firm answer to this question. What I have experienced is that we should follow the IRS guidelines as to what appears to be reasonable salary.

My approach is to always claim a reasonable salary whenever it comes to an S Corp. The danger is you invite an IRS Audit if yon have no salary and substantial pass through income, and if that happens the IRS will assses a reasonable salary, and charge the corporation penalties and interest on delinquent payroll taxes., plus a possible substantial penalty for gross negligence to the owner of the S corporation. Has this ever happened? Yes, and there are substantial cases on record. and recently IRS has hired 1,600 new auditors to curb S Corporation abuses.

So please beware of this recent action by IRS to pursue S Corp. abuses, the chances are you might be audited too. Also, remember claiming a payroll check is the right approach and a W-2 Salary has a lot of advantages in terms of Pension planning and gaining business loans.


Last edited by TaxGuru : 02-07-2007 at 05:50 PM.


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Old 01-18-2007, 12:34 AM
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TaxGuru,

Thank you for your reply. Based on what you are saying, I am going to take a Salary equal to 50% of my profits, just to be safe.



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Old 01-18-2007, 10:22 AM
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Cstatham,

You are welcome, and I think I would agree with your choice of taking payroll.



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