Accounting Advice in Scottsdale, Phoenix, or Paradise Valley

Corporation owner compensation must be enough! Do you have a plan to avoid owing money at tax time?

Accounting Advice in Scottsdale, Phoenix, or Paradise Valley

©2012 by Jeffrey Brooks

IRS is cracking down on S Corporation shareholders’ failure to pay themselves enough payroll.

S corporation owner compensation must be enough! Do you have a plan to avoid owing money at tax time?

Q. Why does IRS have a problem with shareholders’ failure to   pay themselves enough in payroll?

A.  Due to the projected insolvency of social security and medicare, the congress has pushed the IRS to increase payments into the social security and medicare system.  When shareholders pay no payroll or a small payroll amount, social security and medicare is not paid.

Q. What is one of the top priorities and a “hot button” to the IRS?

A.  Paying little or no payroll and payroll taxes is a real concern to Congress and the IRS because employee salary is subject to payroll taxes but the S corporation distribution to shareholders is not. The IRS has stepped up enforcement on this issue and audited thousands of S corporations that paid their owners little or no salary.

Q.  What does IRS do when they find little or no payroll paid to a company’s shareholder(s)?

A.  If the IRS concludes that an S corporation owner attempted to evade payroll taxes by disguising employee salary as corporate distributions, it can recharacterize the distributions as salary and require payment of employment taxes and penalties, which can include payroll tax penalties of up to 100 percent plus negligence penalties.

Q.  Does that mean that I have to pay all of my profits in payroll to me (the shareholder)?

A.  No, but the IRS has ruled that it will pursue big penalties when it concludes that the corporation paid the owner-employee unreasonably low compensation for his or her services.

Q. What can I do to reduce my chances of being audited by the IRS for too low payroll to me?

A. In my view, if you produce all of the income through your services, you will want to follow pay at least in a majority of the profit in payroll to you.  The higher the dollar payroll to you the lower the possibility of coming being caught by the IRS.

Q. What is a reasonable payroll to me?

A. My intuition and recommendations is to watch out for having more distributions or draws paid to you then you take in salary.  For example if you take distributions or draws of $200,000 but only $20,000 in payroll, you will be in trouble if IRS catches you!

Q.  Can IRS force to pay a certain salary to you?

A.  IRS cannot require a business to pay its employees a minimum salary.

Q.  This is confusing, what do I do?

A.  There is not one easy answer to how much payroll you should take.  It is a judgment call. You will need to get a professional opinion from your CPA.

Q. I have been taking distributions and very little payroll. What should I be paid on a monthly basis?

A:  Work from what you need to take home in net payroll.  I help clients with figuring out what the gross payroll and withholdings should be to make sure that you are not under or over withholding taxes.

Q. If I pay this amount does that mean I will not owe any income taxes?

Q.  Why can’t I still take distributions or draws all year and preserve my cash and then catch up with the withholdings and payroll taxes in the future.

Q.   The reason for the monthly salary and withholding is to stop paying amounts through distributions and to avoid the “train wreck” of having to pay a huge year end payroll tax deposit.

A.  No.  After each quarterly financial statement, we will recommend that a bonus be taken with specific amounts of federal and state withholdings being deducted from the bonus.

Q. Will I take any more distributions?

A: No.  Distributions are problematic because they take cash from patient revenues that will be taxable and convert this cash into a distribution/draw that is not tax deductible. By taking a distribution/draw, income tax liabilities increase.

Q.  Why can’t I save payroll taxes and conserve my cash by just taking a small payroll of say $20,000 and  let the balance of my profits flow through to me as distributions or stay in my bank account?

A.  IRS has a new audit program that has the computer review the amount of payroll and payroll taxes you were paid as compared to earnings that flowed through without payroll tax withholding. IRS is assessing penalties, interest and tax on when what they consider a reasonable payroll is not paid.  For instance “other CPA” had you getting most of your money through distributions. Before I got involved you had too much income flowing through that was not subject to payroll tax because it was not paid through payroll.

 

Please let me know if you have any questions. Thank you very much! Jeff Brooks CPA  for JBrooks Wealth Advisors, PC, a CPA and CFP firm who cares about clients!

 

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com