Consequence of S Corp loosing 2nd employee

[Brian175]

What is the name of your state? New York

Hello,
I have a S Corp that started in 2000 with multiple employees, but since 2004 it has been myself and my wife part time. Originally we kept my wife as an employee because many corporate health insurance policies required more than one employee. However, more recently my wife is now getting full benefits through her full time job and the company is not providing any health insurance. We have been paying disability insurance and workers comp, but now I'm thinking that it is time to stop and remove her as an employee. However, I don't want to inadvertently loose another benefit that I have been receiving by having a 2nd employee. Is there any negative consequence of operating a S Corp with a sole employee/owner?
Thanks,
Brian

 

[LdiJ]

What is the name of your state? New York

Hello,
I have a S Corp that started in 2000 with multiple employees, but since 2004 it has been myself and my wife part time. Originally we kept my wife as an employee because many corporate health insurance policies required more than one employee. However, more recently my wife is now getting full benefits through her full time job and the company is not providing any health insurance. We have been paying disability insurance and workers comp, but now I'm thinking that it is time to stop and remove her as an employee. However, I don't want to inadvertently loose another benefit that I have been receiving by having a 2nd employee. Is there any negative consequence of operating a S Corp with a sole employee/owner?
Thanks,
Brian

As long as the owner employee is receiving a reasonable wage (assuming the S-corp has profits), then no, there really isn't any negative consequences that I can think of. Its possible that someone else will think of one however, so stay tuned.

 

[Taxing Matters]

Is there any negative consequence of operating a S Corp with a sole employee/owner?

Without knowing the details of your business and your personal financial situation it is impossible to give you a definite answer for your situation. But generally speaking the only real downside is losing the benefits that she can get as an employee, just as with losing any other employee.

Just be aware that if she is an owner of the corporation and does work for the corporation the tax law provides that any distributions to her from the corporation must first be treated as employee compensation up to the point she has been reasonable compensation for all the work she has done for the corporation. Without getting into the details of it, that would then have an indirect impact on you when it comes to considerations about making distributions from the corporation. So if you remove her as an employee make sure she doesn't do any work for the company. If you are the sole employee, then you'll need to do all the work.

 

[Taxing Matters]

As long as the owner employee is receiving a reasonable wage (assuming the S-corp has profits),....

It's not about profits. It's about distributions the owner/employee receives. Distributions can occur whether or not there are profits. On the other hand, the corporation can be wildly profitable but under the tax law not have to pay the owner/employee any compensation for the work he or she did so long as distributions are not made. It is at the point that the owner/employee is receiving something from the corporation that the corporation must characterize what that payment is. And the tax law will first characterize it as a wages/salary paid up to the point that the employee has been paid reasonable compensation for all the work the employee has done for the corporation.

That discussion only takes into account tax law. Federal and state wage laws may still require at least a minimum wage be paid. The would largely turn on whether the employee is exempt or not.