 How
to pay an S corporation shareholder
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 Dear
Tax Talk,
What are the guidelines, if any, about salary
paid to the sole owner of an S corporation when the year-to-year
net income before any salary ranges from a loss to a very high amount
(say $500,000)? -- Bern
 Dear
Bern,
In an S corporation, a shareholder can receive dividend distributions.
Dividends are generally paid out of current earnings or accumulated
profits. Unlike compensation, dividends are not subject to employment
taxes. Employment taxes are paid on salary paid to the shareholders
as well as to other employees.
Approximately $90,000 (this wage base changes annually
for inflation) paid in compensation to the shareholder is subject
to employment tax of 15.3 percent. Annual compensation in excess
of $90,000 is subject to 2.9 percent payroll taxes.
If the shareholder is paid $200,000 in annual compensation,
the payroll taxes approach $17,000. If instead the shareholder receives
$200,000 in dividends there are no payroll taxes. Whether the shareholder
receives dividends or salary, the income taxes consequences are
the same. There is an obvious incentive to not pay compensation.
The Internal Revenue Service has no specific
guidelines on what an S corporation shareholder should receive as
compensation. If the company is operating at a loss that the shareholder
is funding, then it makes little sense that he should also be receiving
a salary that increases the loss. When the company is operating
at a profit, the shareholder should receive a salary commensurate
with industry standards. The salary relates more to the shareholder's
skills than to the company's profits. The company's profits relate
more to its ability to return profit on equity and hence dividend-paying
capacity.
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