Tax law Requires your S Corporation to pay you a reasonable Salary

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tip Tax law Requires your S Corporation to pay you a reasonable Salary Tax law requires your S corporation to pay you, the owner-employee, reasonable compensation for the work you do. But what about in a year when your corporation has a loss? Does a lack of net profits absolve you from the obligation to pay yourself a salary? No. It sounds crazy, but your S corporation can have a net loss for the year and do something that causes a salary. And if the IRS and/or the courts find that your S corporation did not pay you reasonable compensation, you can experience a new surprise salary, payroll taxes, and penalties. This will make your bad year worse. Basic Law of Reasonable Compensation You likely know that there are times when the law requires your S corporation to pay you reasonable compensation. But when exactly does the IRS require this from your S corporation? Here are some common misconceptions: • Higher profits equal higher salary. • Lower profits equal lower salary. • Zero profits equal zero salary. That’s not how it really works. The IRS looks to see whether you are taking money out of your S corporation. You know this because the IRS explicitly tells you so. In Fact Sheet 2008-25, the IRS states that your S corporation compensation will never exceed the amount you receive either directly or indirectly. This means that if you don’t have your S corporation pay you any money or give you any property, your S corporation does not have to pay you a salary. On the flip side, when your S corporation transfers cash or property to you, this triggers the first step in the IRS analysis to decide whether you must pay yourself a salary. If you expect your S corporation to show a loss and you need to take money from the S corporation, talk to me about a loan strategy and how to make that work so you don’t trigger the surprise salary. Tax season is here. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you Regards, Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale/purchase of a business property in excess of $5,000 • Sale or purchase of a residence or other real estate.