The IRS are coming - run for the Hills!

Or maybe not.

According to Diane Kennedy the IRS has started a pilot program to examine compensation taken by shareholders of S Corporations. The problem is that too many S Corporation owners don’t take any salary at all. That way all profits run through to them in the form of a distribution and they are able to avoid payroll taxes.

Seemed like a good idea at the time, right? Well, the IRS is on to it!

In fact, if you don’t take any payroll from your S Corporation, they are now changing all of the distribution into payroll – and charging penalty and interest.

The best defense is (1) pay yourself some kind of salary. In this case, it is much more unlikely that the IRS will attempt to change all of the distribution into salary. And, (2) draw a reasonable salary from your S Corporation.

What is a reasonable salary? It’s the amount you’d pay someone else for the work you currently perform.

There is one more strategy to calculate the amount of salary – it’s to first calculate how much a reasonable return from your investment in the S Corporation should be. The difference between taxable income and the reasonable return on investment would be your salary amount. Generally, the return method of calculation means a much higher distribution and lower salary. And, that means less tax.

Read more about the details here.

so... as I always say, pigs get fat and hogs get slaughtered - don't be greedy and you'll do just fine.

Oh oh, here comes that dog again - gotta run