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Level 1

Reasonable Compensation

Hi Everyone,

I have never posted here before, so hopefully I have done this correctly and in the right area. I have started a new S corp in August. Since it is newly formed I don't believe I will have profits yet for the year. So my question is, do I have to pay myself an reasonable salary? Other research I have done makes it sound like in the beginning you do not have to especially when there are no profits yet. However, I have taken a few small distributions (less than $500) to pay my tithes from the small income I did have initially before I had higher expenses from buying equipment. I am concerned that those distributions will put up a red flag since I took those, but did not pay myself a salary. I'm wondering if I need to pay myself one in December, and then I could take those funds and put them back into the S corp as I don't want to pull money from it right now. Or if I would be ok to just not take a salary. Opinions please!

 

4 Comments
Level 15

Reasonable Compensation

This is really a question for  a tax accountant, and I think you would be better served getting an informed opinion rather than relying on those from the net.

Level 1

Reasonable Compensation

I understand the tax side of it (it goes in block 12 of the K-1), just wasn't sure how I should enter in Quickbooks.

Level 15

Reasonable Compensation


@jdubndb18 wrote:

I understand the tax side of it (it goes in block 12 of the K-1), just wasn't sure how I should enter in Quickbooks.


There is more to the tax side than what block it reports in.

 

The IRS watches for a salary, and then distributions, if they see it the other way around that can start them asking questions.  The question concerning taking a distribution without a salary is a tax question, the general answer is no do not do that at all.  What I do not know is if there is some precedent in tax rules concerning a company not able to support payroll but still allowing a small distribution.

Level 1

Reasonable Compensation

Somehow I managed to reply yesterday to a question I asked a few months ago. The question in this string is already resolved. Yikes, too many things going on!

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