Welcome to the MDTAXES Message Board

The MDTAXES Network is an affiliation of CPAs that specialize in the tax planning and preparation for young health care professionals.  Please leave your questions or comments for our CPAs, who visit the message board regularly, or review the answers, suggestions and ideas posted in response to your colleagues' questions.

Please check out our other Message Boards available at www.FindAGoodCPA.com.

Please note: We are NOT affiliated with the Maryland Tax Department. If you're looking for information about Maryland income taxes, go to www.marylandtaxes.com.

Corp's, S-Corp's, and LLC's
Start a New Topic 
Author
Comment
s corp salary vs dividends

I have been an employee for one year, and upon partnership next month, will form an S corp with me as the sole employee. I had always thought that as an employee of an s-corp, I must pay myself a "reasonable" salary based on the average salary range of my specialty. I recently consulted with a CPA, who told me since I am just starting out, I should take no salary at all for at least the first six months (taking all my income as dividend, and saving payroll taxes), and then slowly increase my salary over several years, until it is within an average range.

Can I really do this? Thanks for keeping up such a great site!

Zip Code: 78130

Re: s corp salary vs dividends

the requirement is a "reasonable salary" which is not defined and is certainly up to interpretation, although the IRS has been said to be increasing its scrutiny of this. while it sometimes is beneficial to claim a lower salary, it all depends on where you work. for example, NYC has a corporate level tax of close to 9%. so if a physician is already over the ss limit on a salary, additional salary only costs him 2.9% but saves him almost 9% in corporate taxes (although it doesn't make sense to pay 100% out in salary as NYC has an alternative calculation that adds back shareholder salary, but that's for another day). i'd keep your salary very low for the year, until year end when you know all the facts and circumstances, then declare a bonus to get you up to the reasonable salary and pay in the appropriate taxes.

Zip Code: 11797

Re: s corp salary vs dividends

So it sounds like even though a reasonable salary for my specialty may be, say, $100,000-200,000, the first year of my business I could pay myself a salary much lower than this. If the IRS inquires, my defense is that I am just starting out, and so I predict my income for now will likely be lower than this range. As time passes, I understand my salary needs to be within a "reasonable" range. Thanks.

Zip Code: 78130

Re: s corp salary vs dividends

Be cautious about setting your salary too just because you're in your first year. I agree with Andrew that you can wait until the latter part of the year to determine what is reasonable, but there is a history of the IRS hammering sole shareholder professionals (attorneys in particular) who set their wages very low. The last thing you need your first year is to have the IRS down your back.

Also, just because your specialty has a benchmark for your salary, what you pay yourself will also be measured against what's reasonable given your practice's results. If you do twice the normal patient volume of a benchmark practice, what is "reasonable" for you will be measured accordingly.

Zip Code: 43085

Re: s corp salary vs dividends

See the article re: a CPA who got greedy.

http://online.wsj.com/article/SB10001424052748703951704576092371207903438.html?mod=WSJ_PersonalFinance_PF5#articleTabs%3Darticle

Zip Code: 43085