Comments on: Should You Use an S Corporation for a Sideline or Part-time Business?

By: Steve

Steve — Thu, 15 Jun 2017 18:52:00 +0000

In reply to TJ.

Sure. See here: http://evergreensmallbusiness.com/setting-s-corporation-shareholder-employee-wages-to-zero/

By: TJ

TJ — Thu, 15 Jun 2017 12:08:53 +0000

Hi, Steve – I am 100% owner of my S-Corp but I am likely not going to turn a profit in year one, as expected. I will not be taking any distribution, but this might limit my “reasonable compensation” to a very small figure. Is that allowable?

By: Steve

Steve — Thu, 09 Feb 2017 21:22:46 +0000

In reply to Joni. I think you pay some reasonable wage for your actual work. That might mean more modest wage given the seasonality. BTW, very sorry about your dad. :-(

By: Joni

Joni — Tue, 07 Feb 2017 08:52:02 +0000

Hi Steve.
My Dad and I owned a S Corp (60%\ 40%) that provided accounting and income tax preparation. I was very spoiled, my Dad took care of all of the bookkeeping for the business. My Dad passed away a couple of weeks ago, so I’m trying to get up to speed on all that is required.
Now that I am 100% owner of this S Corp, I have a question. My Dad paid himself a wage every month, as he worked every month (he did taxes during tax season and quarterly for other businesses as well as bookkeeping year round) I only prepare taxes during tax season, so it’s more of a seasonal business now. Do I only pay myself a wage during the 3 months I work, or should I take the total annual salary and divide it by 12 months?

Thank you so much for all of the information that you share.

By: Steve

Steve — Fri, 08 Jan 2016 04:28:51 +0000

In reply to Johnny. You may just want to dissolve your s corp...you can then restart again as an LLC and accept the default classification of disregarded entity.

By: Johnny

Johnny — Thu, 07 Jan 2016 18:38:27 +0000

I just found myself in this exact situation. I have a full time job that maxes out the FICA limits. I have been working as a sole prop on the side for a year years only pulling in 20k or less year. In 2015, though, I did great. Bringing in much more. A friend, business owner, recommended I should become a corporation and sent me to his CPA who recommended the same. Now I have to lose all of the employer taxes on all my “wages” from my s corp. Plus an additional 1.5% California s corp tax. If I had done nothing, it sounds like I would have only paid the 3% medicare on ALL my earnings… (and my normal income tax, of course).. I suppose after my taxes are done I may try to convert back to a sole prop. Any advice would be appreciated, thanks!

By: Wolske cpa

Wolske cpa — Thu, 07 May 2015 00:38:47 +0000

In reply to Steve.

Great answer steve
Sincerely
Bill Wolske cpa
41st year doing taxes

By: Juan Alvarez

Juan Alvarez — Thu, 05 Mar 2015 11:42:03 +0000

In reply to Steve. Thanks Steve for your detailed answer.

By: Steve

Steve — Wed, 04 Mar 2015 19:38:22 +0000

In reply to Juan Alvarez.

Hi Juan, great question and issue…

So here’s my take… I have the reasonable compensation talk with a client before we make the 2553 election. And I warn people whenever I see a number that looks imprudently low. But often I see the numbers after the year ends and it’s too late to do anything. So at long as the number isn’t absurd, obviously absurd, I don’t try to finesse the situation. (I might make sure the person does health insurance correctly… and strongly suggest something like a SEP…)

Two other comments related to all this:

(1) I have had a circumstance where a new S corp owner comes to me the first year or whatever and says something like this, “Hey Steve, gee, I know we were supposed to do reasonable compensation… but we took $200K of distributions in first part of year and then got to end of year and didn’t have any money to do payroll. Sorry, I know this was wrong. I guess we’ll need to get better next year…” My reaction to this has been (and I try to be nice), “Well, that’s good I guess… but you know what? I don’t think we can do your return. Sorry. But we do a lot of S corporation returns and I’d never want to do something that makes IRS think we’re helping people break the law… That would not be fair to all our other S corporation clients.”

(2) I really try to push people to the average salary shown in IRS and Bureau of Labor Statistics (and you can still save lots of money this way)… and if someone makes a ton, I tell them to pay $100K or the FICA max, reminding them that pigs get fat and hogs get slaughtered and we want to be pigs and not hogs.

By: Juan Alvarez

Juan Alvarez — Wed, 04 Mar 2015 12:38:25 +0000

Hi Steve, when your S clients don’t take reasonable compensation do you add more?
I usually increase the officer salary per the 1120s and record the income to schedule C of the 1040 with no expenses of course.
Just curious to what others do.