USA Can you answer this question? S Corp shareholder vs. profit splits

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Hi there,

I joined specifically to ask this question so I appreciate you taking the time to read.

I have a small company (S Corp) with 3 shareholders: me (45%), Tom (45%) and Harry (10%). While Harry is happy being having just a 10% equity ownership in the company, he would like (and we agreed to) an equal split in funds generated annually through normal business operations.

The goal is to maintain the current equity split but also for us to be in equal positions at the end of the year from a cash perspective. We obviously want to minimized our respective tax burdens.

Here's a simple example: we have $100K we want to split three ways, (i.e., ~$33K on a pre-tax basis) and end up in a similar place on an after-tax basis. We don't just want to all be on payroll (let's ignore "reasonable compensation" issues for now) as we'd like to use the tax-advantages of the S Corp we set up to the fullest extent. By all means plug in arbitrary income tax rates for us to show how we would do this. Tom and I are mid-income earners, while Harry is a high income earner. We are happy to gross-up anyone after the fact if there's a shortfall.

Let me know if you need any more information. Can you figure this out? I'd really appreciate your help. It makes my head spin.

Rob
 
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This is a question for a mathematician. But to make things simple here's what I would do:

Cut the amount in half. $100,000 -> $50,000
You would get $22,500 in distributions.
Tom would get $22,500 in distributions.
Harry would get $5,000 in distributions.
To get the additional $17,500 in wages before federal withholding Harry would need to get $18,949.65 in gross wages. Gross wages = net wages/(1-FICA tax rate)

Your total would come out to $70,399.30. Total = You + Tom + Harry's Distributions + Harry's Gross Wages + Employer's FICA tax match. Total FICA tax paid would be $2,899.30 or $966.43 each.
 
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Samir

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Ah, so you guys each want the same 'take home pay'. That's a complex formula that will change with every tax law and deduction change. It's a moving target.
 

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