Winning Back-Office Strategies to Boost Your Business Agility
VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
S corporation owners often take modest salaries as a tax accounting strategy for savings. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. The tax savings may be even greater now that the additional 0.9 percent Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) has gone into effect. (S corporation dividends paid to shareholder-employees generally won’t be subject to the new 3.8 percent Medicare tax on net investment income.)
Although S corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tax accounting tactic. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low.
To avoid an unexpected tax bill, S corporations should conduct an analysis — using compensation surveys, company financial data and other evidence — to establish and document reasonable salaries for each position.
If you have questions as to whether you have the right mix of salary vs. distributions for your S corporation’s shareholder-employees, contact Doeren Mayhew’s tax accounting specialists in Michigan, Houston or Ft. Lauderdale.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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