AboutJohn Stancil, CPA Expertise I can answer questions on personal income taxes, partnerships, and some corporate income taxes. Kentucky state income tax also. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I teach tax and accounting at a small church-related college. I have maintained a part time tax practice for over 30 years. I am a member of the AICPA, National Society of Tax Professionals, and the Institute of Management Accountants.
Experience I hold a doctorate in Accounting, and four professional certifications: CPA, CMA, CFM, and CIA. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I write a monthly tax column for the local newspaper.
Expert: John Stancil, CPA Date: 9/10/2005 Subject: S corp salary to shareholder
Question -------------------------
Followup To
Question -
John,
Should a 1 person Sub S corp owner take a salary equal to 100% of his net profit each year? A friend told me that was the rule. I have no employees and he said that is the reason it should all be salary. Everyone I know who owns an S corp takes some salary and some distribution. What in your opinion would be correct? Which method would pass IRS audit if it ever happened?
Fran
Answer -
Fran,
Thanks for your question.
Actually it is just a matter of semantics. As a more than 2% owner of the S Corp, you cannot be a employee of the S Corp. From a tax standpoint, then whatever you withdraw from the corporation is a distribution from you capital.
As you know you are taxed on the profit made by the company, not the amount of salary or other withdrawals you make.
Hope this helps.
John Stancil, CPA
John,
But, wait, I'm confused. If I take a salary I'm paying the FICA tax. I don't pay any FICA tax on the K-1 income from the S-corp. I guess my question really was: Must all my income in an S-corp be called "Salary" and thus be FICA taxed, or can I split some to salary and some to simply K-1 income. All this in a context of me being the only person working for the S-corp. Thanks.
Answer Sorry, I was not quite clear enough in my answer. The amount you take as a salary is subject to the FICA Tax as you state. Your share of the profits beyond that is taxable income whethere distributed or not, is subject to income tax but not FICA.
The 2% rule applies to fringe benefits. A 2% or more shareholder in an S corporation is not considered an employee for fringe benefit purposes and therefore cannot receive tax free fringe benefits.
