What is the best way to adjust the salaries/distributions of S corporation shareholders so that each may be compensated based on the percentage of work they performed, and so the shareholders can take the best advantage of distributions not subject to payroll taxes?
Example: A, B and C start an S corporation by contributing $10,000 each, thereby establishing 1/3 equity for each. All three shareholders plan to work for the corporation, but they will not bill the same number of hours and they have agreed to be paid a salary based on the percentage of hours they bill. At the end of the year A has billed 1000 hours, B has billed 750 hours, and C has billed 500 hours all at the same rate of $100 an hour. The corporation has generated $225,000. The shareholders plan to be conservative and take 70% of the company's income as salaries, and 30% as distributions. Assume there is no need for retained earnings. Also assume that the industry standard salary will be met so there is a reason to declare a distribution saving the shareholders payroll taxes on 30% of the corporation's income. How should the shareholders pay salaries and take distributions that will compensate them based on the percentage of work they each performed, and will also take maximum advantage of distributions not subject to payroll taxes?
At 70% salaries and 30% distributions, the payroll is $157,000, and the amount left for distributions is $67,500. However, based on what they have agreed, A is entitled to approximately 44% of the $225,000, B is entitled to approximately 33% of the $225,000, and C is entitled to approximately 22% of the $225,000.
If the distributions must be made in equal 1/3 shares based on the equity, at first glance it seems in order to pay each based on the amount of work he performed the corporation would have to pay more in salaries and less in distributions, thereby incurring more payroll taxes. Is there a better way?
Example: A, B and C start an S corporation by contributing $10,000 each, thereby establishing 1/3 equity for each. All three shareholders plan to work for the corporation, but they will not bill the same number of hours and they have agreed to be paid a salary based on the percentage of hours they bill. At the end of the year A has billed 1000 hours, B has billed 750 hours, and C has billed 500 hours all at the same rate of $100 an hour. The corporation has generated $225,000. The shareholders plan to be conservative and take 70% of the company's income as salaries, and 30% as distributions. Assume there is no need for retained earnings. Also assume that the industry standard salary will be met so there is a reason to declare a distribution saving the shareholders payroll taxes on 30% of the corporation's income. How should the shareholders pay salaries and take distributions that will compensate them based on the percentage of work they each performed, and will also take maximum advantage of distributions not subject to payroll taxes?
At 70% salaries and 30% distributions, the payroll is $157,000, and the amount left for distributions is $67,500. However, based on what they have agreed, A is entitled to approximately 44% of the $225,000, B is entitled to approximately 33% of the $225,000, and C is entitled to approximately 22% of the $225,000.
If the distributions must be made in equal 1/3 shares based on the equity, at first glance it seems in order to pay each based on the amount of work he performed the corporation would have to pay more in salaries and less in distributions, thereby incurring more payroll taxes. Is there a better way?
