S Corp Salary 60/40 Rule

Tuesday, March 2, 2021

March 02, 2021

S Corp Salary 60/40 Rule

Another way to determine reasonable compensation is researching companies similar to your own with the US. I would pay social security and medicare only on 40000 and not on the 60000 in distribution.

Reasonable Compensation Salary In An S Corporation Cpas And Advisors Accounting Services And Wealth Managment Biel Fisette Iacono Llp Dallas Tx

The S Corp 6040 Salary Rule This is where you pay 60 of your business income as your salary and the remaining 40 as a distribution.

S corp salary 60/40 rule. The 6040 rule essentially says to take 60 percent of profits as salary and 40 percent as distributions. The 6040 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Bureau of Labor Statistics.

The S corporation is saving him 82650 in medicare tax. Superficially this S corporation salary rule sounds great. Using this formula they divide their business income into two parts with 60 designated as salary and 40 paid as shareholder distributions.

For years probably for decades accountants have tossed around a seeming logical rule that says 60 of the S corporations profit should be paid out as wages and the remaining 40 paid out as distribution. In fact the 60 40 rule is not officially implemented or recognized by the IRS. Lets say that you earned 100000 in an S-Corp instead of the LLC.

S Corporation Salary Rule 4. You qualify for the 20 deduction only if your total taxable income for the year is less than 157500 single or 315000 married filing jointly. Then the shareholders report this income on their personal tax returns and pay taxes on their total combined income at personal tax rates.

Total income is 3000000. Rather its a rule of thumb thats used by many accountants. Heres a simple strategy that you can try and its called the 6040 rule.

Suppose Alice is the sole SE of her S corporation and is its full-time CEO. Pay 60 of your business income to yourself in the form of employee salary. For example following this rule someone earning 80000 per year would pay themselves a 48000 salary and a 32000 profit distribution.

Under the 60- 40 approach the profits of the S corporation before shareholders salaries would be split as 60 for salaries and 40 for distributions. However CPAs and other tax professionals have used the S Corp salary 60 40 rule for years. Pay yourself 40 of your business income in the form of distributions.

The key is that your salary should never be less than distributions. Typically accountants use a 6040 rule where 60 of profit is taken as salary and 40 as dividends. Technically this isnt a hard and fast rule.

S-Corp Salary 6040 Rule When the IRS started to require all officers that provide services to corporation receive wages some accountants used 6040 approach for paying salaries and distributions were 60 of the net income were advised to be paid as wages and 40 was advised to be paid as distribution. As your S Corp income increases the reasonable S corp salary paid to the shareholders do not necessarily increase on a pro rate basis. The general rule of thumb I use is 40 salary and 60 distribution.

A more logical rule is to make the salary a percentage of the net business income of the S corporation before considering the salary deduction for example between 30 and 40. Because profit flow through and dividends are not subject to FICA self-employment tax. The 60-40 approach is an arbitrary rule and CPAs should understand that.

In other words if you peg your salary at 60000 and that is supported with labor data your salary does not double just because your net income in your S corporation doubles. This isnt an IRS rule and has never been officially approved by the IRS. The 60- 40 method is not a defense if the IRS comes calling but it is something and generally considered safe under normal circumstances.

Thomas King is a graduate of the University of Pittsburgh School of Law where he served as managing editor of the Pittsburgh Journal of Environmental and Public Health Law. For example if i make 100000 my first year as a real estate agent and operated my business as an S-Corp I would pay myself 40000 and 60000 as distribution k1. The S corporation S corp is a special kind of corporation that passes corporate taxes through to the shareholders.

Starting in 2018 owners of S corporations and other pass-through entities may deduct up to 20 of their net business income from their income taxes. The owner takes a salary of 150000 leaving 2850000 to flow through. Many CPAs use an arbitrary 6040 rule and would tell you to pay yourself 60000 of wages and take the other 40000 as a profit flow through or dividend.

60 Wages 40 Distributions. Why would they do this. The S Corp Salary 60 40 Rule.

A 6040 split allocating 60 to salaries and 40 to distributions Setting salary at anything over the Social Security wage base 132900 for 2019 Salary as 13 of the companys taxable income Any of these approaches can work.

How To Pay Yourself From Your S Corp What Is A Reasonable Salary The Hell Yeah Group