I recently started a practice and formed an S-Corp. As an S-Corp would I be able to save on my payroll taxes by reducing my salary and paying the remainder in the form of a shareholder "distribution". I know that I cannot make my entire salary a distribution. I also know that this will not save me anything in Federal income tax. However, by giving myself a shareholder distribution, it would significantly decrease payroll tax. I look forward to your response.

Zip Code: dr_ericmiller@yahoo.com

You are correct. When your practice is set up an an S-corp, you're allowed to take a portion of the net income as "S-Corp distributions" instead of as salary. By doing so, you avoid paying the 2.9% Medicare tax (and the 12.4% social security tax if your salary is below $90,000 in 2005.)

The IRS is aware of this loophole, and requires that you take reasonable salary each year. What salary is considered reasonable in the eyes of the IRS? You need to figure out what you would earn working in your profession for another practice in your area.

Another issue to factor in is that you base your maximum profit sharing plan contributions on your salary. Amounts you take as an S-Corp distribution don't count. You need to determine whether being able to contribute more to your retirement plan outweighs the 2.9% in additional payroll taxes you'll end up paying.

Good luck with your new practice!!

Zip Code: cpa@mdtaxes.com

Thank you very much

Zip Code: dr_ericmiller@yahoo.com