Did you form your S corporation in order to pay fewer taxes? If so, then paying the lowest-possible salary is the big strategy in your arsenal.

What Do You Get with a Low Salary?

The low salary

saves payroll taxes,

allows splitting of more income, and

can help manage deductible losses.

Save Payroll Taxes

Example. If Bill Smith operates as a proprietorship, he pays self-employment taxes of $14,130 on his $100,000 of income.1 If Mr. Smith operates this business as an S corporation and pays himself a salary of $50,000 and takes $50,000 as a distribution, he saves $7,065 in self-employment taxes.

Distributions do not trigger the self-employment tax. You can see that Mr. Smith has a powerful motive to keep the salary low.

Risk factor. If Mr. Smith’s salary becomes too low, he faces payroll tax penalties of up to 100 percent as well as negligence penalties.2

Split Income and Save More Taxes

The splitting income strategy generally involves giving stock to lower-tax-bracket relatives so the family unit as a whole saves tax money.

Example. John Ford has gifted 40 percent of his S corporation stock to his parents and his wife’s parents. If the corporation earns $200,000 and he takes a salary of ... Log in to view full article.