[ryanjmo]

Are you a solo owner? You need to take an s-corp election and you do not need to pay yourself that type of salary. At most you should pay yourself $54,000 a year.

The reason is money that goes through an s-corp you don’t pay self employment taxes on. Salary you do. That is 15%.

You wouldn’t need to pay yourself more than $54,000 without the government getting upset.

Right now, based on $54,000 a month you are losing about $90,000 a year not being structured like this.

The rest of the money, you can just transfer to your personal account and do whatever you want with. It is all your money as a solo owner, so if you want it just send it to yourself.

I’ve been through this exact situation before and I’m currently a tax strategist and help people with this type of stuff everyday.

When we had all that extra money, I moved to Asepn Colorado and had a bunch of fun skiing and living it up.

You can do whatever you want with the money, but please get your s-corp election set and stop paying yourself $14k a month.

If you want help reach out. I think my email is still in my profile.

[WORMS_EAT_WORMS]

Between an S-Corp structure and having an i401k... definitely awesome for taxes. Nothing really competes for contractors.

I'd take the advice here of what dictates a "reasonable salary" with grain of salt however. $54k is not some magic cut off. Income only a factor in calculating it.

Here is official document. Purposely vague of course so it can be the IRS s discretion or a legal battle: https://www.irs.gov/pub/irs-news/fs-08-25.pdf

Just get an accountant. Pay yourself as low a salary as they recommend and document how you arrived there.

[oliv__]

I have a (maybe dumb) question about salary: wouldn't "officially" paying myself $54k / year result in my not being able to rent or buy real estate where there are income requirements?

[adbachman]

Could be. My experience (in multiple cases) was that they accepted bank deposit slips and Quickbooks invoice records, though.

It also has implications for unemployment insurance and SS calculations.

Your social security payout will be lower if you spent 20 years earning $50,000 than if you spent 20 years earning $100,000. Unemployment checks (which you can receive even if you're a self-owned s-corp) will be smaller too.

The long-term benefit assumes you weren't an idiot with the extra income. Even if it's post-tax, tucking the extra $$ away in your favorite safe investment vehicle will probably leave you better off over 20 years than whatever extra Social Security you would've made when you hit 65.

[cercatrova]

Yes that can definitely happen so you'll need to be careful about that. For some areas or houses, you can show your bank statements rather than income, but not all places accept those.

[taxcoder]

There are businesses dedicated to assisting S-corp owners in determining reasonable compensation. While $54,000 is not a ridiculously low number, there is no "magic number" that makes the IRS happy. Remember, you are working for the corporation. The requirement is for a reasonable salary, based on the work performed and local market conditions. What would it cost to hire someone else to do the same work?

[throw1234651234]

Are you saying that if you have an S-Corp, and not an LLC, any money the company makes past $54,000 annually is tax free?

[akcreek]

So still an LLC, but it is taxed like an S-Corp when this election is made. This allows an owner working in the business to be an employee and take a reasonable salary. W2 income is subject to FICA taxes, but all the other profits in the business pass through to the owner as usual for an LLC, but aren't subject self employment tax or FICA. You still pay regular income tax though. This is all at a federal level.

[paulclinger]

It's not tax free, as you're still paying the income tax on it, but if you (as the owner) get it as distribution instead of salary, then you're not paying payroll taxes on it, which is what was suggested in the parent comment. You'll have to make sure you're paid "reasonable compensation" (https://www.irs.gov/pub/irs-news/fs-08-25.pdf).

[sgc]

S Corp profit is pass through, so you pay taxes on it. But it is not employment income, so no self-employment tax on top of regular income tax.

https://www.investopedia.com/terms/s/subchapters.asp

[throw1234651234]

Picking a random comment to reply to since all of these are good answers - thanks everyone!

[s1artibartfast]

Not OP, with a s Corp it is not completely tax free. Money past 54k would be handled differently and free of payroll taxes.

[adbachman]

Other replies said it, but to put it more clearly:

Is "any money the company makes past $54,000 annually is tax free?" Not even close!

You have to pay income tax (federal, possibly state) on _all_ the money you make. That's very important. Like, "at best a fine, at worst jail time" important.

I was a solo S-Corp for three years and had to learn all this stuff. Here's a breakdown:

Payroll taxes (federal) are taken only out of your salary. If you work for a business as a W2 employee--hourly or exempt--you pay half your payroll taxes, and the business pays half your payroll taxes. The 15% total in payroll taxes (SS, Medicare, FICA) is 7.5% paid by you, and 7.5% paid by the business on top of the salary they are paying you.

So, for example, if your salary is $50,000 per year, you will have $3,750 deducted from your paycheck for payroll taxes and your employer is responsible for an additional $3,750 on top of that. Disregarding income tax, taking a $50,000 salary means getting paid $46,250. But to pay you that $46,250, it costs the business $53,750.

All well and good if you and the business are different people. It wasn't your money to begin with. But if you are the employer and the employee, which is the case for solo S-Corp structures like this, then the whole 15% is coming out of your pocket.

Let's say your business earns $120,000 a year and you decide to pay yourself a $100,000 salary. That costs $107,500 (gross) and you keep $92,500 (net). If you decided to pay yourself a $54,000 salary instead, that costs $58,050 and you keep $49,950. Your profit is ($120,000 - the cost of your salary) and your total earnings are net salary + profit.

In the first case, (120,000 - 107,500) + 92,500 = $105,000. Congrats, you made $105,000! That's a lot of money. Now you pay income taxes on it.

In the second case, (120,000 - 58,050) + 49,950 = $111,900. Congrats, you made $111,900!

Thus, you took home $6,900 more this year because you paid yourself a lower salary, all due to payroll taxes.

---

What's the catch? Why not pay yourself $1 a year and increase your stacks?

The IRS has a rule for S-Corporation employees that says they must be paid a "reasonable salary" (https://www.irs.gov/pub/irs-news/fs-08-25.pdf). Ultimately they get to decide if you are taking as a payroll-taxable salary is "reasonable".

The way I had it explained to me is that I would need to be able to testify before a judge that whatever salary I picked is "reasonable" (not necessarily market rate) for a person with my skills in my location. $1 a year isn't even minimum wage, so that's out. Minimum wage is out because I can't argue with a straight face that the local minimum wage is a "reasonable salary" for a software developer. So it's up to each individual S-Corp owner to pick a number that they could argue is a "reasonable salary". In this case, $54,000 is probably safe because the IRS has bigger fish to fry.

As in all matters of legal and financial decision making: talk to your lawyer, talk to your accountant, don't talk to cops.

[throw1234651234]

Late, but thank you very much for the detailed response.

[cityzen]

Sort of but you don’t even need to have an S-Corp, you can apply as an LLC filing as an S-Corp. BUT You have to do it at the beginning of the year.