Help Please! S-Corp Question

[Bobbyg223]

Hello, my name is Bob and i'm new to this site. I am currently forming a landscaping business in New Jersey, which I plan to run as an S corporation. I am aware that owners of an S corporation pay self-employment taxes (social security) only on compensation (salaries and bonuses) paid to them, not on profits automatically paid to them as a shareholder (dividends). I know that in order to take advantage of this benefit, I could as a corporate owner, pay myself a low salary, and thus receive the remaining profits of the business as dividends, avoiding a great deal of hefty self-employment taxes. Finally im aware that this is a strategy that might cause the IRS to challenge S corporation owners who lower their salaries below a “reasonable” level. My question is this: How low can I make my salary before it is possibly seen as “unreasonable” by the IRS. What ratio of salary to dividends payment to the owner/operators is common or acceptable? Should I do a payment of 50% salary and 50% dividends? Or could I lower my salary to be 30%, and dividends to 70%, or even go as low as to only receive 10% of my income from salary? Keep in mind I am a very small business, operating with a small amount of assets (about $3,000).

I would appreciate any advice I could get on this matter.

thanks,
Bob

[CCLS]

I personally have a sub S corporation. I pay my self $100.00 per week salary. If I need extra dough I pay it out as dividends, which like you stated avoids the social security tax. If you have a good accountant like I do, you never make any money in this business you know what I mean?

[bcg]

CCLS, how long have you been doing that? You do realize that unless you've got some other source of income at some point the IRS is going to say that there is no way you could have lived on $4800/yr and start reclassifying your income in a way that won't be as favorable for you as if you'd done it more legitimately to begin with. If your accountant is willing to pay all your fines and interest, more power to you but if he isn't, you might want to seek the advice of another CPA to find out jus thow much exposure you've got here. I sure don't want to be you the day the IRS comes knocking...

[MGO]

Bobby....
My company is an LLC, but my Accountant files as an S-Corp.....somehow,......it is legal...because I am a Sole Owner of LLC or something like that. Same reason you stated......soc sec taxes can be minimized this way. I have to "pay myself" a reasonable wage for the work I do for it to be viewed as legitimate. i.e. I can't pay myself minimum wage for work that is normally performed for a higher wage.

ANyway, I STRONGLY recommend that you simple get yourself an accountant (CPA) to handle that for you.....they have to carry "error and omissions" insurance plus they are the experts...so if they "screw up" it is on them.

My accountant only costs me a few hundred dollars per year because I keep track of my own books in Quickbooks and turn the information over to her at the end of the year and she files my taxes in whatever way is best for me.

[CCLS]

CCLS, how long have you been doing that? You do realize that unless you've got some other source of income at some point the IRS is going to say that there is no way you could have lived on $4800/yr and start reclassifying your income in a way that won't be as favorable for you as if you'd done it more legitimately to begin with. If your accountant is willing to pay all your fines and interest, more power to you but if he isn't, you might want to seek the advice of another CPA to find out jus thow much exposure you've got here. I sure don't want to be you the day the IRS comes knocking...

I only work 10 hours a week for $10.00 per hour. I do not like to over exert myself. If you hire the right staff, they will run your business for you and all you have to do is supervise. I prefer to supervise for 10 hours a week.

[waverider]

If you need an answer to your question, email me directly maipenrai7770@yahoo.com
I would be happy to help you, however its going to cost you .....
Not. just kidding, simple question a simple solution.