Setting Low S corporation Salaries

Need help coming up with a reasonable S corporation salary?

S corporations can save their owners enormous amounts of tax. How? By correctly setting salaries for shareholder-employees and thereby reducing payroll taxes. But the process is tricky.

Set the salary too low and you run the risk of an IRS examination. That's bad. Really bad. In an audit, a too-low salary means not only that you will be required to pay back the S corporation tax savings you thought you were getting, but it also means you'll be assessed severe penalties. Ouch.

Set the salary too high, however, and the situation is even worse. You may needlessly overpay your payroll taxes. And overpaying your payroll taxes could easily be a million-dollar mistake over the course of your business's life.

Double-ouch. To help you make better decisions about setting your S corporation salary, I've prepared a short, easy-to-understand 18pp document, "Strategies for Setting Low Salaries for S Corporation Shareholder-employees."

Written in plain, everyday language, this $37.95 document explains how to save thousands of dollars a year with your S corporation--but at the same time how you can do so ethically and responsibly and 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.

Table of Contents

  • Introduction
  • How Low S Corporation Salaries Save Payroll Taxes
  • When Low S Corporation Salaries Don't Save Money
    • Gotcha #1: Extra Fees and Out-of-pocket Expenses
    • Gotcha #2: State Income Taxes
    • Gotcha #3: Multiple Shareholder-employees
    • Summarizing what the "Gotchas" Mean in Practice
  • How S Corporations Commonly Set Salaries
    • Average S Corporation Salaries
    • S Corporation Salaries Across Different Size Businesses
    • Treasury Inspector General Pronouncements
  • What the IRS and Courts Say On-the-record
  • What the Internal Revenue Service Says Off-the-record
    • One-Man S Corporation Salaries
    • When There Are Other Employees and Capital Investments
    • Unofficial Minimum Salary Amounts
    • Salary-Distribution Breakdown Formulas
  • What Knowledgeable Tax Practitioners Often Recommend
  • Five General Rules of Thumb for Setting S Corporation Salaries
  • Applying the Rules in Practice
    • Example #1: The One-Person Service Business that Makes $80,000 Annually
    • Example #2: The High-priced Professional that Makes $500,000 Annually
    • Example #3: The Semi-inactive S Corporation Making $20,000 Annually
    • Example #4: The Traditional Small Business With Employees and/or Assets
  • Conclusion
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