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S-Corp Owner Salaries

I keep hearing that the IRS is continuing to crack down on S-Corp owners that take too low of salaries.

For a brief background, as the owner of an S-Corp, you can (should) take a salary for your services. However, one of the benefits of having your small business taxed as an S-Corp (as opposed to a partnership, sole proprietorship, or C-Corp) is that once you’ve taken a reasonable salary, you can take out cash as dividends rather than wages. This can save a considerable amount in payroll taxes, and it’s perfectly legal.

What I keep hearing about are businesses where the owners take little or no salary, and therefore all of their pay is considered dividends. When the IRS finds out about this, they can reclassify some or all of that pay as wages, which can trigger penalties and interest (in addition to the extra payroll taxes that were avoided).

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