Do S Corp Shareholders Have to Take a Salary?

S companies, often known as S corps, are well-liked company formations that provide small business owners with a number of tax advantages. But one of the most frequent queries from S corp shareholders is whether they must accept compensation from the business. Depending on a few different criteria, the response is both yes and no. First, it’s crucial to remember that S corp stockholders are also regarded as members of the company’s staff. Since they are considered employees, they must pay some employment taxes including Social Security and Medicare. S corp shareholders, on the other hand, have some discretion over how they are compensated.

The IRS mandates that S corp stockholders receive “reasonable” compensation for the services they render to the business. As a result, if you work for the business, you are required to pay yourself a salary that is on par with what you would pay another person to do the same job. In light of the services offered and the sector in which the company works, the salary must be fair.

So, do you have the option to decline a salary? Yes, technically. However, you can come under IRS investigation if you decide against accepting a wage. This is because the IRS can infer that you’re attempting to avoid paying employment taxes if you don’t pay yourself a salary. The IRS could categorize your income in this situation as salary and charge employment taxes, fines, and interest in accordance.

Generally speaking, it’s not a good idea to sell your car to your S corp. Even though it would seem like a straightforward approach to give the business some cash, it can lead to a number of tax complications. The difference, for instance, if you sell your car to your S corporation for more than its fair market value, will be regarded as taxable income to you. On the other hand, gift tax regulations can apply if you sell it for less than its fair market value.

It is acceptable to give yourself a bonus from your S corporation as long as it is reasonable and performance-based. Once more, you must confirm that the bonus is reasonable and consistent with industry norms and that it is comparable to what you would pay someone else to perform the same task.

How many shares should your S corporation have, in total? Your ownership stake will vary depending on a variety of variables, including the number of shareholders, the amount of capital committed, and the ownership split. Generally, it is advised to begin with a limited number of shares and issue more as necessary. By doing this, you’ll be able to keep control of the corporation and make sure that any new shareholders support your corporate objectives.

Finally, despite the fact that S corp stockholders are not required to get a salary, it is crucial to pay yourself a fair wage to prevent IRS attention. Paying yourself a bonus is acceptable as long as it is reasonable and performance-based, but selling your car to your S company is generally not advised. It’s advised that you start with a limited number of shares and issue more as needed because the number of shares you have in your S corp will rely on a variety of things. As usual, it’s best to seek advice from a tax expert to be sure you’re abiding by all necessary guidelines.