Setting Low S Corporation Salaries

Are you an accountant or attorney serving S corporation clients? We have a resource just for you. Updated for 2018 and Sec. 199A, our "Setting Low S Corporation Salaries" monograph ($100) provides detailed, actionable information on the S corporation tax loophole, including how to balance the "old rules" for saving payroll taxes with the "new rules" related to the Sec. 199A "pass-thru entity" deduction.

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Specifically, the monograph provides expert insights regarding recent IRS action as well as average salary data by small business size and industry. Further, it delivers easy-to-understand tips useful for safely setting tax-saving salaries.

In short, this concise guide (roughly 100 pages in length) provides the information you need to save thousands of dollars a year with your S corporation--but in a way that minimizes both the chance that your S corporation tax return will be examined and the chance your S corporation salary will be rejected by the Internal Revenue Service.

For more information, you can scroll down and review the table of contents.

Table of Contents

Chapter 1, “How S Corporations Save Payroll Taxes,” goes over the basics of the payroll tax savings an S corporation creates.

Chapter 2, “Reviewing the Law,” discusses the relevant statute, the two on-point revenue rulings, and then the key treasury regulation. Chapter 2 also discusses very briefly a handful of the “old standard” court cases.

Chapter 3, “Common Subchapter S Salary Practices,” presents the available IRS S corporation salary data, reviews the last Treasury Inspector General Reports, and then discusses some common rules of thumb we all hear both fellow practitioners and S corporation owners use.

Chapter 4, “Single Shareholder Situations,” discusses whether a single-shareholder, single-employee S corporation works.

Chapter 5, “The Sec. 199A Deduction Complication,” describes how the S corporation tax savings gambit works in light of the new Sec. 199A deduction.

Chapter 6, “Avoiding Unreasonable Distributions,” shoots off on a tangent and discusses minimizing shareholder distributions to minimize risks.

Chapter 7, “Developing Reasonable Compensation,” walks the reader through an eight-step process for developing a low “reasonable compensation” amount that safely complies with the law.

Chapter 8, “Practitioner Case Studies,” reviews half a dozen common situations and then applies the general approach described in this monograph to each.

Chapter 9, “Risky Practices and Danger Zones,” briefly discusses a handful of shortcuts and hacks that many tax accountants will want to watch out for—and probably avoid.

Chapter 10, “Winning the Reasonable Compensation Audit,” discusses why S corporations get audited, and then what to do if in an audit the revenue agent raises the issue of shareholder-employee reasonable compensation.

This monograph also includes five appendices:

Appendix A provides a copy of Revenue Ruling 59-221 because it’s often rather difficult to track down unless you’ve got a good tax library.

Appendix B provides a copy of Revenue Ruling 74-44 for the same reason.

Appendix C provides the relevant portions of H.R. 4213, a piece of legislation that nearly passed in 2010 and would have closed the S corporation “loophole” for many businesses.

Finally, Appendixes D and E provide boilerplate texts for year-end letters or emails that tax accountants may want to send their clients.

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