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8 Replies Last post: May 7, 2008 11:41 AM by Santa Fe CPA

S-Corp formation, what is required for salary and taxes

May 6, 2008 1:52 AM

alohara 3 posts since
Apr 15, 2008

I'm in the process of launching a small business and have chosen to form an S-corp for liability protection and longer term tax reasons. I plan on initially acting as the CEO, President, and Treasurer. The business won't generate a profit for at least six months, and even then it would not cover a reasonable salary for the above officer positions. My question is for this initial 6-12 month period do I need to pay myself a stated salary for one or all of the above officer positions. I understand that officers should be paid a reasonable salary but can I pick something as simple as $12K per year for all positions total? Is my total obligation for corporate taxes at this point just paying the employment taxes for the salary? Or as the owner do I not need to worry about any of the salary and payroll/SS/fica tax issues?

Thanks for all responses.

Tags: corporation, taxes, tax, payroll, s_corporation Report as inappropriate

LUCKIEST 8,136 posts since
Aug 6, 2007

1. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 7:17 AM

S-Corp formation, what is required for salary and taxes, Welcome
Tell us more. As the owner you DO NOT need to worry about Salary,
*BUT do need to stay on top of *payroll /SS /fica tax issues?
Where are you (like city and State). What kind of business??
How soon do you plan on opening?? Do you have an Accountant??
Have you developed a Business and Marketing Plan??
Do you know about SCORE?? SCORE is FREE and can help you succeed
and maybe even answer your tax questions.
Good luck, LUCKIEST

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Johnsquest68 42 posts since
Apr 30, 2008

2. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 7:40 AM

Alohara,

My business is also incorporated as an S Corporation. The basics are keep your books in order, log everything. keep a seperate folder for your expenditure receipts, anything and everything you purchase for the business, paper, computers, pens, pencils, etc. Keep the receipts for tax purposes. If you haven't done so already, get yourself a good ledger contact an accountant, and retain an attorney. Three very good books for you to have are, "tax savvy for small business", "Legal forms for starting and running a small business" and "Legal guide for running a small business". They are all printed by NOLO.

We can help you further with a little more information about your business.

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alohara 3 posts since
Apr 15, 2008

3. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 12:41 PM

in response to: Johnsquest68

Thanks for the information. I'll checkout the books you've listed. I plan on retaining a lawyer and accountant at the appropriate time, but will not do so initially at startup. I plan on using LegalZoom to incorporate and Quick Books for book keeping. I basically need to take that step to setup a bank account, merchant account, and other services in the corporation's name. My main question was do I have to pay myself a salary, and pay the subsequent taxes that go along with being a salaried employee. I've read that the IRS requires that a reasonable salary be paid to any employee, including officers, but is that truly the case in practice when a single-person company is just starting up. I won't likely have any revenue for the first 4+ months of startup. Thanks,

alohara

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Johnsquest68 42 posts since
Apr 30, 2008

4. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 1:02 PM

in response to: alohara

If you draw a salary from the corporation, then yes, you are responsible for that amount at tax time. And yes, you do have to pay in fica, social security and any state and local taxes. Always consult your accountant for all the tax laws.

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Santa Fe CPA 67 posts since
Oct 10, 2007

5. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 5:27 PM

Alohara

By Internal Revenue Service definition you are, as an officer and director, an employee of the corporation and as such you are required to pay yourself a salary. That said, the business needs to provide sufficient income and positive cash flow to cover the payments. If you are operating in the red then the requirement becomes moot. The salary paid must be "reasonable" in comparison to the income of the business and salaries paid by like businesses of similar size. The principal behind the regulation is to prevent the pass through of income to the shareholder(s) without the FICA and MC taxes.
To stay out of trouble from the start, you should hire an accountant/bookkeeper who is able to use QuickBooks the "Right Way" to keep you on the straight and narrow. I am a Certified QuickBooks Professional Advisor and have seen too many accounting files made a mess by the owner doing his own bookkeeping.

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dollsbags 26 posts since
Dec 6, 2007

6. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 5:56 PM

in response to: Santa Fe CPA

Thank you for that correction. I was apparently misguided by my own cpa.

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alohara 3 posts since
Apr 15, 2008

7. Re: S-Corp formation, what is required for salary and taxes May 6, 2008 7:08 PM

in response to: Santa Fe CPA

First, thank you all for the feedback, it has been helpful. I just want to summarize and clarify the responses before I put this to rest for my own sake, and for other people who may have a similar question.
In the situation I described above:
1) I have to have a stated salary as an officer, director, etc. of the new S-corp (let's say $12k/year) but I if the company is in the red I don't have to pay myself that salary, and hence I don't have to pay any of the associated payroll, SS, fica taxes until the company starts to make money and I start drawing a salary-
True or False

Thanks.

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Santa Fe CPA 67 posts since
Oct 10, 2007

8. Re: S-Corp formation, what is required for salary and taxes May 7, 2008 11:41 AM

in response to: alohara

Hi Alohara,
You are on the right track.

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S-Corp formation, what is required for salary and taxes

May 6, 2008 1:52 AM

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