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S-Corp, Owner Reasonable Salary, Owner Distribution

foleyt

Junior Member
#1
What is the name of your state (only U.S. law)? Colorado

My position at the company is Accounting Manager, I handle the day to day finances and pay bills. My salary is $100K per year.

Once the company is paid off, it's very likely that my owner distribution will be anywhere between $100K to $175K annualy.

Do you think that because I have paid myself a reasonable compensation for at least 3-4 years, I am "safe" from the IRS would coming after me for receiving such a large "bonus"? My salary will always remain the same, except I'll probably add 5% per year.
 


LdiJ

Senior Member
#2
What is the name of your state (only U.S. law)? Colorado

My position at the company is Accounting Manager, I handle the day to day finances and pay bills. My salary is $100K per year.

Once the company is paid off, it's very likely that my owner distribution will be anywhere between $100K to $175K annualy.

Do you think that because I have paid myself a reasonable compensation for at least 3-4 years, I am "safe" from the IRS would coming after me for receiving such a large "bonus"? My salary will always remain the same, except I'll probably add 5% per year.
Your owner distribution would not be a bonus and its best that you not refer to it as a bonus. You are paying yourself a very reasonable salary for the duties that you are performing. Since you state that you will likely give yourself an annual raise, you will probably be ok.
 

foleyt

Junior Member
#3
Your owner distribution would not be a bonus and its best that you not refer to it as a bonus. You are paying yourself a very reasonable salary for the duties that you are performing. Since you state that you will likely give yourself an annual raise, you will probably be ok.
Thanks for the information. Is the correct term "Owner Distribution"?

You are 100% correct...calling it a bonus can cause tax liability issues.
 

Taxing Matters

Overtaxed Member
#6
What is the name of your state (only U.S. law)? Colorado
Do you think that because I have paid myself a reasonable compensation for at least 3-4 years, I am "safe" from the IRS would coming after me for receiving such a large "bonus"? My salary will always remain the same, except I'll probably add 5% per year.
Whether the salary is “reasonable” depends on all the details of what you do for the company and how much a person would get paid to do the same things as strictly an employee (i.e. at a company where you had no ownership interest). Understand that if the IRS were to determine that the salary is insufficient the result is that the IRS will recharacterize part of that shareholder distribution (not bonus) as salary. Whether you are safe from an audit on this issue is, of course, impossible to say with certainty. If you get audited and can justify the $100k salary as reasonable you’ll be fine on that issue.
 

foleyt

Junior Member
#7
Whether the salary is “reasonable” depends on all the details of what you do for the company and how much a person would get paid to do the same things as strictly an employee (i.e. at a company where you had no ownership interest). Understand that if the IRS were to determine that the salary is insufficient the result is that the IRS will recharacterize part of that shareholder distribution (not bonus) as salary. Whether you are safe from an audit on this issue is, of course, impossible to say with certainty. If you get audited and can justify the $100k salary as reasonable you’ll be fine on that issue.
The average salary for an Accounting Manager in Denver, CO is right around $90K to $110K so it looks like I'm in the average range.

Thanks
 

latigo

Senior Member
#8
What is the name of your state (only U.S. law)? Colorado

My position at the company is Accounting Manager, I handle the day to day finances and pay bills. My salary is $100K per year.

Once the company is paid off, it's very likely that my owner distribution will be anywhere between $100K to $175K annualy.[SIC]

Do you think that because I have paid myself a reasonable compensation for at least 3-4 years, I am "safe" from the IRS would coming after me for receiving such a large "bonus"? My salary will always remain the same, except I'll probably add 5% per year.
"Owner distribution"? How about "shareholder dividends"?!

As a supposed corporate employee YOU "pay yourself a salary"?

YOU determine what is a reasonable compensation for your services?

"Once the company is paid off " YOU can project a 75% increase in your salary?

YOU can declare that you are entitled to a bonus?

As an "account]manager" supposedly earning $100K per annum YET CAN'T SPELL "ANNUALLY"

YOU need to ask total strangers how IRS treats an employee's "supplemental income"?
_______________________________

COME ON! You're making this up! Not everyone in here just fell off of a turnip truck.
 

LdiJ

Senior Member
#9
"Owner distribution"? How about "shareholder dividends"?!

As a supposed corporate employee YOU "pay yourself a salary"?

YOU determine what is a reasonable compensation for your services?

"Once the company is paid off " YOU can project a 75% increase in your salary?

YOU can declare that you are entitled to a bonus?

As an "account]manager" supposedly earning $100K per annum YET CAN'T SPELL "ANNUALLY"

YOU need to ask total strangers how IRS treats an employee's "supplemental income"?
_______________________________

COME ON! You're making this up! Not everyone in here just fell off of a turnip truck.
Huh? Latigo you obviously do not know much about S-corps and taxes so this probably isn't one of those threads where you should be spouting off.
 
#10
COME ON! You're making this up! Not everyone in here just fell off of a turnip truck.
No, he’s not making this up. While he did not state it directly, what is implied is that he is not only an employee but also a controlling shareholder, perhaps the sole shareholder, in the corporation. My guess is that you are not a tax attorney and are not familiar with the tax treatment of corporations under Subchapter S of the Internal Revenue Code (IRC), known as S corporations in tax parlance. My practice is concentrated in tax and I get similar questions from clients frequently. The reasonable compensation issue is in fact a big deal for S corporations.

"Owner distribution"? How about "shareholder dividends"?!
And, by the way, S corporations do NOT pay dividends (as that term is used in tax law) ever unless they had previously been a C corporation with undistributed earnings and profits and thereafter converted to S corporation status. If the S corporation has always been a S corporation it will not pay out dividends. So in this instance, the term dividends has a different meaning than it does under state corporate law. The correct tax law term for distributions that a S-corporation makes with respect to its stock is, well, distributions. So yes, the OP got that right. And so did the tax professionals that used that term in this thread.
 
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