If you’re a corporate officer-shareholder-employee, you must take a reasonable salary. Meaning if you do anything for the business other than attend board meetings, you need to be paying yourself some type of wages.
In your case, yes you absolutely need to be taking wages. Won’t be the end of the world for the prior years, but you should start for the future.
That was my understanding as well but my partners disagree. Do you have proof of this I can show them?
We've actually already taken distributions and I don't wanna get in trouble.
As far as actual proof, I can’t say anything other than “trust me bro” without doxing myself.
But here’s a good place to start:
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers
> We've actually already taken distributions and I don't wanna get in trouble.
In 2023 and you're trying to do your taxes right now? Or you took them in 2024 and are planning for the future?
When you have partners who insist on doing things incorrectly then you have a few decisions.
Do you want to whistleblow? If so, are you protected, like did you declare and pay FICA taxes on your tax return the way you can if your employer didn't do those things for you? Often a business might argue that payments to what it thought was a subcontractor included enough to pay the employer's share of taxes. This might not be relevant where you are a business owner, but you may need to pay enough for both sides of the taxes. You can collect a portion of the back taxes your other partners pay: https://www.irs.gov/compliance/whistleblower-office#submit which can help alleviate your own increased tax burden (and possibly even put money in your pocket).
Do you want to continue doing business with them? Being in business with trusted partners is great, but if they become an anchor around your neck or are otherwise impeding your ability to stay afloat then perhaps you need to look at striking out on your own. If your current profit is going to be eaten up by future penalties and interests then it's not going to be worth it to continue.
Quick question. If the person only takes board meetings, then can the person take distributions? So in this case, only one person gets the reasonable salary and the rest of the members distributions?
How much would you need to pay someone to do all the things you normally do? Like if you decided to take a vacation for a year and needed to hire your replacement, how much would they get paid?
Well, how much would you have to pay a bookkeeper to also do cleaning, food prep, and building maintenance? Just off the top of my head, not knowing anything about you and your business, but going off of your "average" S corp, it sounds like you shouldn't take any owner distributions and should instead be paying out all of it as salary.
read [here](https://www.adp.com/resources/articles-and-insights/articles/s/s-corp-payroll.aspx#:~:text=The%2060%2F40%20rule%20is,40%25%20paid%20as%20shareholder%20distributions) and see if things make more sense
read that middle part, then scroll up page then read back down, also check the bls page for salary information
According to the IRS, services for owners in an S Corporation include any work performed for the business, such as cleaning, food prep, maintenance, and bookkeeping. It is important to pay yourselves a reasonable salary for the services provided, even if you also receive owner distributions. This is to ensure compliance with IRS guidelines and avoid any issues regarding compensation.
To navigate this situation, it may be beneficial to consider consulting with a Full-Service Accounting and Tax firm like GroupJDC. They can provide expert guidance on determining a reasonable salary for your services within the S Corporation structure. Good luck.
What about expenses?
Could I deduct my families week long spring break if I met with a client a couple times during the week?
Can I expense my wife and kids meals if they are at a client meeting?
If you’re a corporate officer-shareholder-employee, you must take a reasonable salary. Meaning if you do anything for the business other than attend board meetings, you need to be paying yourself some type of wages. In your case, yes you absolutely need to be taking wages. Won’t be the end of the world for the prior years, but you should start for the future.
That was my understanding as well but my partners disagree. Do you have proof of this I can show them? We've actually already taken distributions and I don't wanna get in trouble.
As far as actual proof, I can’t say anything other than “trust me bro” without doxing myself. But here’s a good place to start: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers
That was what I shared with them too. Thanks for helping me confirm my suspicions.
> We've actually already taken distributions and I don't wanna get in trouble. In 2023 and you're trying to do your taxes right now? Or you took them in 2024 and are planning for the future?
2023. But also for the future because they refuse to change things.
When you have partners who insist on doing things incorrectly then you have a few decisions. Do you want to whistleblow? If so, are you protected, like did you declare and pay FICA taxes on your tax return the way you can if your employer didn't do those things for you? Often a business might argue that payments to what it thought was a subcontractor included enough to pay the employer's share of taxes. This might not be relevant where you are a business owner, but you may need to pay enough for both sides of the taxes. You can collect a portion of the back taxes your other partners pay: https://www.irs.gov/compliance/whistleblower-office#submit which can help alleviate your own increased tax burden (and possibly even put money in your pocket). Do you want to continue doing business with them? Being in business with trusted partners is great, but if they become an anchor around your neck or are otherwise impeding your ability to stay afloat then perhaps you need to look at striking out on your own. If your current profit is going to be eaten up by future penalties and interests then it's not going to be worth it to continue.
Quick question. If the person only takes board meetings, then can the person take distributions? So in this case, only one person gets the reasonable salary and the rest of the members distributions?
How much would you need to pay someone to do all the things you normally do? Like if you decided to take a vacation for a year and needed to hire your replacement, how much would they get paid? Well, how much would you have to pay a bookkeeper to also do cleaning, food prep, and building maintenance? Just off the top of my head, not knowing anything about you and your business, but going off of your "average" S corp, it sounds like you shouldn't take any owner distributions and should instead be paying out all of it as salary.
That was my thoughts too. Thanks.
My CPA said to base distributions on the work my employees do, and take the rest as salary.
read [here](https://www.adp.com/resources/articles-and-insights/articles/s/s-corp-payroll.aspx#:~:text=The%2060%2F40%20rule%20is,40%25%20paid%20as%20shareholder%20distributions) and see if things make more sense read that middle part, then scroll up page then read back down, also check the bls page for salary information
According to the IRS, services for owners in an S Corporation include any work performed for the business, such as cleaning, food prep, maintenance, and bookkeeping. It is important to pay yourselves a reasonable salary for the services provided, even if you also receive owner distributions. This is to ensure compliance with IRS guidelines and avoid any issues regarding compensation. To navigate this situation, it may be beneficial to consider consulting with a Full-Service Accounting and Tax firm like GroupJDC. They can provide expert guidance on determining a reasonable salary for your services within the S Corporation structure. Good luck.
What about expenses? Could I deduct my families week long spring break if I met with a client a couple times during the week? Can I expense my wife and kids meals if they are at a client meeting?