The short answer to whether an owner of an s-corporation should take a salary is yes. Of course, there are exceptions which is why this is occasionally an area of confusion for business owners, but this guide should help clear things up.
3 Reasons for an S-Corp Owner to Take a Salary
To Meet the IRS Requirement
The IRS requires a shareholder of an s-corp to take a salary if the officer provides services to the organization. Courts have found that shareholders are considered employees of the corporation and as such, they are subject to employment taxes. If the officer is taking distributions and no salary, the IRS can reclassify these dividends as wages and there will not only be employment taxes owed, but penalties and interest. These can be substantial and non-deductible.
To Avoid a Potential Audit
The IRS has been saying they are going to hire new agents with the goal of auditing partnerships and s-corporations. In this event, it would seem one of the main areas they will be examining is shareholder salary. In fact, an article written by IRS attorneys predicts that lack of officer compensation is one item that increases the risk of an audit.
To Pay In to Social Security
By taking a salary, you will be paying into the social security system. The less that is paid in, the less (if any) can be taken out. Also, with earned income, a retirement plan can be set up and money for retirement saved. There are some myths that the social security system will eventually fail, but this is most likely untrue. In that event, the government will have to find a way to raise more taxes, and what better way to make sure that everyone who is required to take a salary does so and pays into the system?
How Much Salary?
There is no set scale as to what salary an s-corp owner should take, but the IRS will be looking at several items. Scroll over the icons below to learn more:
A good safe harbor to use would be to take a salary up to the social security max. If you’d like a specific range or number for the officers in your organization, we can help you come up with a formula to determine what the salary should be.