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You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > S-Corp & Distributions
Expert: John Kirk, CPA
Date: 8/13/2008
Subject: S-Corp & Distributions
Question
QUESTION: I recently formed an S-Corp for a part-time business that I run in my spare time. I am also a full-time W2 employee during the day. What is the best way to pay myself and reduce the overall amount of taxes I pay? Should I pay myself in distributions? If so, do I need to pay myself as W2 and how much? Also, at what point is the corporation itself taxed? Should I make sure my balance at the end of the year is near zero?
ANSWER: You need to pay yourself a reasonable salary, neither too high or too low. The Corporation which has a S election is not taxed on its ordinary income.
John Kirk, CPA
www.johnkirkcpa.com
---------- FOLLOW-UP ----------
QUESTION: Thank you very much for the answer, I'll most likely end up having a CPA handle this for me, but I want to be educated a little beforehand.
If the work I do is part-time is it reasonable to base the salary on the amount of work done, even if the distributions end up being much higher than the salary? For example, if I spend 3 weeks developing a product and a couple hours a week supporting it, but the income say is 100k over a year. Could I pay myself 10k in salary and 90k in distributions or is the salary too low?
Answer
Distributions are not a deduction from income, so they are not taxable to you unless you exceed the capital balance in your account.
What is ordinary and necessary would be what you would pay in the market for similar services from a third party.
Have your CPA advise you on the determination of a reasonable salary.
John
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