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Minimum compensation for owner of closely held C corp
Anonymous4 views2 answers
Hello, I am the sole owner of a C Corporation and wasn't planning on paying myself a salary initially. However I have heard that there are some minimum salary requirments. Even if the corporation is not yet profitable. Am I required to pay myself compensation, and if so, how much?
Thank you for your time
I am not aware of any minimum compensation; however, the IRS will be on the lookout for reasonable compensation. The game in the corporate world is to pay less salary if you are an S-corporation because more will flow through to you and not be hit with payroll tax or to pay more to you if you are a C-corporation because less profit will be double taxed. So, the IRS is concerned about reasonable compensation, which is a rather gray area. If your company makes no profit it would likely be reasonable to pay its owner nothing. If your company makes a $1 million profit, some compensation would likely be necessary and it really depends on how much effort you put into the business as compared to how much the assets produced the profit without your involvement. Here is a little blurb from the IRS that talks about the issue with regard to an S-corporation. http://www.irs.gov/newsroom/article/0%2C%2Cid=200293%2C00.html
One of the advantages of a corp (whether C or S) over an LLC is that you can allocate corporate earnings between compensation and profit payments. The latter are not subject to payroll taxes, whereas in an LLC all earnings are deemed to be compensation, subject to those taxes. So, many lawyers counsel corp owners to specify that part of the earnings are to be reported as compensation to minimize the employment tax hit on the corp’s earnings, which is good planning. But this may have been misinterpreted to mean you must pay salary even if there are no earnings. I don’t see any point in doing that; it would just mean payment of unnecessary payroll taxes. Ask your CPA about this.
