Hello Steve!

Thank You — appreciate your articulateness! That’s exactly what I was planning to do, with 2 returns, as doing do otherwise is asking for an audit…

Thanks once again — I look forward to utilizing your S-Corp strategies more fully for 2016 Taxes…

Cheers!!!
–Andy

Hi Andy, so good question… And the answer is that if you run your business for part of the year as a sole proprietorship and for part of the year as an S corporation, you need to “split” the income and deductions into two separate businesses. Income and deductions for “unincorporated” part of the year go on a Schedule C inside your 1040… and income and deductions for the “incorporated” part of the year go onto the 1120S corporation return… and then the corporation’s profit will make its way onto your 1040 return either in the form of W-2 wages or as a distributive share (a profit share) reported on the K-1 that goes to the shareholder. (I.e., Andy the employee gets a W-2 from the S corp and Andy the shareholder gets a K-1 from the S corp.)

Great Article — I also have purchased your Salary for S-Corp Ebook and Quick Payroll Ebook! I had a quick question:

I was a Sole Proprietor from Jan – August 2015 (let’s say income is $5000) — I changed it to LLC (S-Corp) from August 2015

Question: Is it legal to transfer/put the income from Sole Proprietor to S-Corp (i.e, in August, can I expense the $5000 income from Sole Proprietor, so that Sole Prop Income =0; and S-Corp income increases by $5000)

I am asking because, having all the Income in S-Corp may save on 2015 taxes, and also is simpler in terms of preparing the tax return

Any insight is much appreciated!!!
–Andy

Regs and court cases say you have to pay reasonable compensation. If you pay a lot of tax-free fringe benefits, that should create compensation would means the box 1 value can be lower.

E.g., if someone pays themselves an $80K base plus $20K of health insurance (which goes in box 1 but not in box 3 and box 5) and then does a 25% SEP-IRA match on the sum ($80 plus $20K), I think your compensation is $125K… and that’s going to be reasonable in most situations.

BTW, just to play with this even a bit more, if you paid yourself $100K (which at times has sort of seemed to be Warren Buffet’s salary?) and you add $20K for health insurance (which isn’t taxed) and then you do a 25% match which adds another $30K of pension, you’re earning and paying FICA and Medicare on $100K but taking another $50K of tax-free benefits, and gosh, if it’s true Warren Buffet has paid himself $100K to run his business, you should be able to pay yourself $100K in wages and $50K in fringe benefits to run your small business.

is the amount in Box 1 in W-2 ALL that the IRS looks at when determining if S Corporation XYZ is paying its shareholder a reasonable salary?

If not Box 1 alone, is the entire W-2 what the IRS looks at in order to determine if reasonable compensation is being paid?

thank you