One of the popular tax planning strategies of S-corporation owner is to pay himself or herself as little as possible so as to save the payroll taxes (social security and Medicare).
For example, if your business income before your salary is $100,000, instead of paying yourself in full via payroll of $100,000, you may want to allocate less amount to payroll and leave the rest as business income for owner distribution. The more you can allocate to business income, the less payroll tax you will need to pay.
We know this loophole, IRS also knows it.
Accordingly, it is required by law that the s-corporation owners pay themselves reasonable amount of payroll so as to pay some social security and Medicare tax. Your question must be what reasonable means.
It depends on your industry statistic of compensation , the nature of your work, the hours you work, how much work you delegate, the city where you work and the reason why you need to pay less when your company is less profitable than the industry average etc. I also recommend you document this rate in corporate minute.
There are two possible situations that the s-Corp does not need to pay the owners through payroll:
1. When you can document in the minute that the owner is an passive investor and fully delegate to a manager to run the business.
2. If the s-Corp generates a loss, the owners can choose not to pay themselves. In such case, avoid any distribution even though there is cash flow available. IRS may take an aggressive position to deem you have salary instead of distribution. They may go after you for payroll tax and penalty by turning your distribution to payroll.
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