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  • S Corp

    To any docs out there in S-Corps, how do you decide how much to pay yourself in W2 income versus quarterly distributions?

    Based on current revenues, our groups total income per partner is around 400-450k per year.  We pay ourselves 300k on W2 and the rest of income comes through distributions or retirement account profit sharing.

    I am wondering if it would be worthwhile to decrease W2 income, especially if the new tax proposal goes through which would lower corporate tax rates (this would help S-Corps, right?).

    Large surveys say that the average income in my field is anywhere from 250-300k.

    The questions I have is

    1) How low would be "too low" of a W2 income.

    2) Would a sudden change of our W2 income be dangerous in that it could trigger audits

  • #2
    My husband uses the amount required to max out his 401k for himself and his employees.  This year it is 270K, next year 275K.

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    • #3
      IRS fact sheet FS-2008-25, Wage Compensation for S Corporation Officers, lists the following factors in determining reasonable compensation: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine compensation.

      In essence, you should pay yourself a salary commensurate with your industry, experience, and (my add) location. This last factor is where "what comparable businesses pay for similar services" applies. The rule of thumb we use in our office and to which @spiritrider has alluded is that your salary should not be less than your distributions. However, I don't believe that if you are a physician and your practice earns only $200k in a year that you should pay yourself a salary of $100k.

      Dr. Mom's husband has a practical determination of his salary, which sounds pretty reasonable to me. However, the amount of salary is not an objective calculation. I can tell you what I think is too low but not what it should be. That is something for you and your CPA to discuss. I cannot tell you if the sudden change would trigger an audit. Doubtful, but at least partly due to the fact that the IRS is so underfunded.

      The changes to the corporate tax rate, at this time, do not appear to be applicable to professionals (service-based businesses). There are a lot of formulas calculating this and that which I will wait for someone with a higher IQ to sort out.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Another practical consideration is making sure your salary is not set so slow that you hurt your max disability payment if something should happen to you.  We were never clear if distributions were considered the same as salary in how insurer's calculated their benefit.  My husband's salary would allow his max disability payment if ever needed.

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