{"id":3145,"date":"2016-05-09T05:05:02","date_gmt":"2016-05-09T12:05:02","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=3145"},"modified":"2017-10-12T14:35:01","modified_gmt":"2017-10-12T21:35:01","slug":"setting-s-corporation-shareholder-employee-wages-to-zero","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/setting-s-corporation-shareholder-employee-wages-to-zero\/","title":{"rendered":"Paying Zero\u00a0S Corporation Shareholder-Employee Wages"},"content":{"rendered":"

\"Business<\/a>I stumbled onto an online forum discussion recently where participants were berating some new S corporation owner about paying zero S corporation shareholder-employee wages.<\/p>\n

Now, I need to tell you that you are required if you operate as an S corporation to pay shareholders reasonable compensation. The Subchapter S election acceptance letter you get from the IRS makes this point in firm, almost threatening language.<\/p>\n

But the truth is, a variety of situations exist where an S corporation can set a shareholder-employee\u2019s wage to zero.<\/p>\n

Zero-wages Scenario #1: You\u2019re Not Working<\/h2>\n

So a first, maybe too obvious situation: If you\u2019re not working in an S corporation\u2014like say you used to work in the business but you\u2019ve now retired\u2014you don\u2019t need to pay yourself wages.<\/p>\n

A \u201creasonable wages\u201d amount for someone who doesn\u2019t<\/em> work in the business equals zero.<\/p>\n

By the way, if you are going to take this position, you obviously need other people working in the business doing the job you used to do if the business still actively operates.<\/p>\n

And just to make this obvious but awkward point: If you\u2019re really working in the business? Even if you\u2019re working only a little bit? Hey, you have to pay yourself wages. No question.<\/p>\n

Note:<\/strong> A decade or so ago, I heard an IRS technical issues advisor (which is a sort of internal consultant at the Internal Revenue Service) cleverly make this point\u00a0in a practitioner forum, \u201cHey, if grandma is retired in Florida and her grandkids are running the S corporation back in Seattle, we\u2019re not going to try and argue she needs to have shareholder-employee compensation.\u201d<\/p>\n

Zero-wages Scenario #2: You Don\u2019t Take Distributions<\/h2>\n

Another supportable zero-wages scenario occurs when the S corporation pays no wages but also pays no distributions or other payments to a shareholder.<\/p>\n

In other words, if you have an S corporation that makes $100,000 in profit and the corporation pays out none of this profit as wages or as distributions to shareholders, you don\u2019t need to worry about a zero wages situation.<\/p>\n

Here\u2019s why: The IRS can\u2019t force you process payroll. They can only re-categorize amounts (like distributions) that you\u2019ve paid out to a shareholder as wages if you haven\u2019t paid reasonable compensation. Accordingly, if you haven\u2019t paid out anything to a shareholder\u2014if all the profits for the year still sit there in the company checking account\u2014you don\u2019t need to worry about not having reasonable compensation for a shareholder.<\/p>\n

By the way, a quick caveat: This \u201cno distributions to re-categorize\u201d scenario isn\u2019t a long-term solution. Eventually you\u2019ll want to withdraw your profits. And when those draws start, you\u2019ll have to start taking care of the payroll business.<\/p>\n

But sometimes the \u201cno distributions to re-categorize\u201d scenario solves the shareholder-employee compensation for a new S corporation.<\/p>\n

Zero-wages Scenario #3: You\u2019re Losing Money<\/h2>\n

One final potential zero-wages scenario is worth mentioning: the case where your S corporation is losing money.<\/p>\n

Now let me clarify that probably this scenario is a variant of the scenario where you\u2019re not taking distributions. But because this is a special mess, let\u2019s talk specifically about the situation where your S corporation loses money and you\u2019re taking a salary.<\/p>\n

If your S corporation loses money, you have probably stopped your distributions. And you may even be feeding the losses by investing additional personal funds in the business.<\/p>\n

In this case, you can probably also stop or pause shareholder-employee payroll.<\/p>\n

You don\u2019t want to be in situation where you, for example, invest an additional $20,000 into your S corporation so you can pay yourself another $20,000 of wages. This set of transactions has no income tax effect. The $20,000 of wages expense deduction on the S corporation\u2019s tax return and the $20,000 of wages income you receive from the corporation cancel each other out.<\/p>\n

But the roundtrip the money takes probably triggers $3,000 to $4,000 of payroll taxes. When you pull the $20,000 back out of the corporation in the form of wages, you\u2019ll owe roughly $3,000 of Social Security and Medicare taxes and then probably also state unemployment taxes and workers compensation taxes.<\/p>\n

If you are in a situation where your S corporation loses money, therefore, talk with your tax accountant about temporarily zero-ing out your shareholder-employee payroll.<\/p>\n

Two Downloadable eBooks You Might Find Interesting<\/h2>\n

People regularly email or call and ask about a couple of things: how to set an S corporation salary and how to do payroll for a single employee situation easily and cheaply.<\/p>\n

Accordingly, we’ve published a couple of economical ebooks: our Five Minute Payroll ebook<\/em> and our Setting Low Salaries for S Corporations<\/em> ebook.<\/p>\n

\"mattrd39_04\"<\/a><\/p>\n

Completely updated for 2017, the Five Minute Payroll ebook explains how to do simple cookie-cutter payroll for most one-employee S Corporations using base salary amounts of $10,000 a quarter or $16,000 a quarter. (These amounts mean annual compensation levels of $40,000 or $64,000 for a shareholder employee and this may work, especially if combined with a pension or health benefits,<\/em>\u00a0for almost everyone.)<\/p>\n

The Five Minute Payroll e-book includes sample IRS forms you can copy to get your quarter end or year end payroll done in a few minutes, including 941s, W-2\/W-3 and 940. Furthermore, the e-book provides some common-sensed tips you can use to set a reasonable salary for your S corporation and to minimize your state payroll taxes burden, too.<\/p>\n

If you’re interested in buying and then\u00a0downloading\u00a0this ebook (price $20), click this button:<\/p>\n