I have many clients who have S Corporations and are always asking how much profits should be paid in salary and how much can be taken as income not subject to payroll taxes.There is not clearcut answer, but the Bradford Tax Letter has this situation and a little clearing up of the problem: “A standard S corporation tax strategy is to pay a low salary to save on payroll taxes.Earlier this year, we published an article titled “Reasonably Low Salary for S Corporation Owner”that addresses what you need in order to justify a low salary and states that the zero salary is out. David E. Watson, CPA, a tax partner in the Iowa accounting and wealth management firm ofLarson, Watson, Bartling, and Juffer (LWBJ) suffered a salary-too-low problem. He and the other partners in the firm operated as individual S corporations with a 25 percent interest each. The firm paid its profits to the four individual S corporations of the partners. In 2003, Mr. Watson’s S corporation paid him $24,000 in salary and $222,000 in dividend distributions. The IRS disagreed. It wanted $199,000 in salary and $47,000 in distributions. Mr. Watson took the IRS to court, asking for summary judgment. During the court’s [...]
Brian’s Tax Musings
Well now that tax filing time is over (except for extensions) it will soon be time to do some planning for next year’s taxes. WHAT!! Wait a minute; we just finished filing and now you want to start worrying about next year? Well you don’t have to start planning tomorrow, but get into the habit of thinking of items that will help save you taxes well before the end of the year. Maybe in May or June you can call me and we can discuss things you can do now to save you taxes when you file. If you wait until 2012 to think about it, it is too late..
Brian’s Tax Musings
Has anyone talked to you about bunching deductions? There are times that you may not qualify for more than the standard deduction, but if you can bunch your deductions in alternating years, this may allow you a bigger deduction. Say your total itemized deductions are just under the standard deduction; if you bunch your medical deductions, contributions, make an extra mortgage payment, etc, maybe in alternating years you may have enough deductions to get more than the standard deduction. This could also work if you itemize but just miss a medical deduction or a miscellaneous itemized deduction because of the limitations (7.5% of AGI on medical, 2% of AGI on misc.) Bunching these deductions will take some planning and you may not like your cash flow if you have to pay some things early to qualify, but saving some taxes may make this worth looking at