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I am about to create an S Corporation for liability and tax purposes, and I wanted to get a general feel for a tax question before asking an attorney or CPA about it.

I have a day job, for which I pay income tax, social security, etc. One of the advantages of an S Corp is that part of the income can be considered salary (and thus subject to the aforementioned taxes), and part can be a company distribution.

My question is this: can I choose not to take a salary from the company? Because I already have a salary, and any profits I earn (marginal, if anything, for the first year) will be needed for more business expenses.

I often see examples: say your company makes $100,000 in profit. You could pay yourself a salary of $50,000, which is reasonable for my field and taxed, and the remainder would be a disbursement.

But what if profit is $500? Obviously $250 would not be a reasonable salary, and really, I wouldn't really be interested in paying social security tax on it because that amount money is never going to enter my pocket.

Is my question reasonable? Am I making any fallacious assumptions here? How does an S-Corp deal with taxes on profits that are really quite marginal - small enough that the "$100,000 in profits" example doesn't apply?

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3 Answers

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As long as you are not paying yourself dividends as employment-tax-free distributions, then salary does not need to be paid. The IRS writes:

The IRS sends this reminder: An S Corporation must pay reasonable compensation (subject to employment taxes) to shareholder-employee(s) in return for the services that the employee provides to the corporation, before a non-wage distributions may be made to that shareholder-employee. This issue has been identified as an area of non-compliance and will receive greater scrutiny in the foreseeable future

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up vote 1 down vote

IANAL/IANACPA

Generally you can work salary-free, especially in low-revenue times, as long as there is no apparent alternative salary being collected. EG: If the company can barely pay for utilities, then it's obvious why you are not drawing a salary. If the company is paying your rent, car lease, cell phone bills, arranging trips to "business meetings" in the Bahamas and so forth, then the accounting gets a little more particular.

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up vote 0 down vote

You can choose to not take a salary from an S corp. Your day job is not relevent to the question nor is the arbituary amounts of profit. An S corp is a seperate legal entity. You have two methods of taxation for S corps. It can be treasted as a corporation and subject to the double taxation or treated more like a LLC where the profits are taxed for each individual.

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You cannot choose not to take a salary from an S corp if you have income to distribute to shareholders. See John's answer. – littleadv May 23 '12 at 0:50

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