Forums: Discussions for entrepreneurs and small business.

I formed an S-Corp LLC in late spring. It is a 2-person entity -- my wife and I (50/50). I finally landed an IT contract early last month, and those bi-monthly checks are put directly into the business account. There are little to no expenses at this point: The only distribution has been reimbursement back to me for start-up costs, self-funding, some software, etc. My wife is currently a full-time student, and those costs are kept personal, not in the business. There are no employees, just my wife and I as owners. And it will most likely stay that way.

My question is what is the proper way to pay myself? I'm currently bringing in about $9000/month, and haven't paid myself a dime yet. "Paycheck"? Equal dividends to my wife and I? Another method? Any suggestions would be appreciated.

Thanks,

Joel

As an S Corp. you will be subject to employer taxes on the salaries paid (as well as federal and state unemployment taxes). You do not have to pay these taxes on funds that are distributed as dividends (the recipient still has to pay income taxes on the funds received). However, having said that, keep in mind that the IRS and the states may take a look at how the profits that are allocated as income to the shareholders and what is allocated as dividends. They will want to make sure that the owners are taking a reasonable salary. Allocating 99% of the profits as dividends and 1% as ordinary income will not cut it with the IRS, Unfortunately, nowhere in the IRS regs, etc. is there a definition a to what constitutes a “reasonable salary.”

Keep in mind that allocating profits and losses in an S Corp are done in proportion to the ownership interests, i.e., if you own 60% and your partner 40%, then profits and losses are allocated 60/40.

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga