Poll: Corporations - Low Salary/ No Salary

[Black Bart]

Dany posted about a client inherited from a retiring CPA who advised client not to take a salary (as you know CPAs have lots of credibility and are a hard act to follow). She's seen several of these go unaudited and so have I over the years.

The puzzling thing is that for over 20 years I've heard IRS, seminar speakers, trade pubs, professional orgs, newsletters, and other preparers say strict enforcement of "reasonable" salaries is imminent, that IRS is "tightening up," and fines for "slack salaries" (-0-/$5K/$10K/$15K) are just around the corner. I still hear it every year. Thing is -- as far as I can see and other than isolated cases -- it hasn't happened. The axe has not fallen; at least not in my neighborhood -- maybe yours is different.

No one's complaining about tax savings, but lax enforcement creates a big problem. Clients think IRS rules are followed closely and strictly -- if a respected practitioner does this for years (decades aren't uncommon) without audit, they figure it must be okay. And all our contrary protests/cites are disregarded or taken with a grain of salt.

So...I think it would be interesting to know how many here have had corporate audits and officers' salaries raised (not audits off somewhere else or only read about, but your own personal experience).

You can check more than one box.

[Jiggers]

The agent requested the Corporate Minutes and read all of them (2 notebooks) before conducting the audit.

3 shareholders (33-1/3% each).

3 vehicles, 100% used by 3 shareholders. Corporate minutes covered that and issue never raised.

Large amount of repairs was questioned, no change.

The corporation was flagged for an audit by a 1099B that was issued to the corporation by a brokerage house. For CD's invested from corporate funds and then cashed and deposited into the corporate bank account. These were not shown on the Schedule D. This wasn't revealed by the auditor until he looked for the information on the 1099B and couldn't find it. After he completed auditing everything else.

But the amounts were traced through the bank account showing that they were CD's.

No change on the audit.

[JohnH]

I've never had an audit of an S-corp client, although I've been expecting several of them for years due to the warnings and cautions you cited. I did have a C-corp audit in 2009 in which the sole shareholder had taken lots of cash out over and above his salary.

We had to do battle over whether a large number of distributions were loans or constructive dividends. (they probably all should have been constructive dividends, but the auditor agreed with some of my oddball rationale). In the end, I think the audtor was generous on this issue because if didn't really matter very much - the loans must eventually be repaid with after-tax dollars. About the only thing the reclassification accomplished was to push the ultimate loan repayments out a few years and avoid "understatement of income" penalties for the prior years. When you add in the fact that the corp must pay tax on the interest income, which the taxpayer can't deduct on his personal return, we probably didn't save much anyhow.

This situation doesn't really address your question, because IRS doesn't really mind low salaries in a C-corp but they continue to say they're gunning for them in S-corps. Although a c-corp dividend at the current tax rate on dividends isn't much different than an s-corp distribution from PTI when all the taxes are netted out, even allowing for the double taxation. Depending upon total income and marginal tax rates, the C-corp dividend may even cost less in income tax than the comparable S-corp profit.

[MAJ]

Audit - Salary Increase...

I want one!!
I am clueless to this...
Can you explain the reasoning behind this?

Are we saying it's been determined that certain Salaried people worked TONS of overtime and are improperly classified as Salaried?? Hence the force for Salary Adjustment??

THAT'S ME!! HELP!!!

[RitaB]

In the hood

I still hear it every year. Thing is -- as far as I can see and other than isolated cases -- it hasn't happened. The axe has not fallen; at least not in my neighborhood -- maybe yours is different.

Same thing with farm losses. (Not to hijack your thread, BB.)

[veritas]

two audits for S corps

The first one was audited to verify lottery income. They also brought up the distributions and said they might want to reclassify some as wages. The auditor said "and we never lose". To which we replied "give it your best shot". No changes.

The second audit occured because they were running a program for high earnings/distributions vs. Low wages.

We lost on that one. Although I did get him out of all interest and penaties.

[ChEAr$]

These warnings about how IRS is going to crack down on S corporation shareholders' low salaries have been rampart since ... since... 1995? And seminar speakers have been spreading the gospel.

Like the little boy who cried "wolf".

[taxxcpa]

Imminent crackdown

I read about the 'red flag' items all the time. I've never had a client audited for failure to take a salary from an S-Corp. I warned one client several times, but he ignored my warning. Later the client wanted to collect SS, and thought he qualified since he had no salary, but the SSA denied it since he wasn't old enough to draw it without reduction for his earnings--and they included his S corp profit as part of his earnings.

[Black Bart]

So let it be written, so let it be done.

Audit - Salary Increase...I want one!!

No problem! Proceed as follows:
1. Incoporate yourself (if you haven't already)
2. Hold a board meeting with yourself.
2. Make a motion that President/Vice-President/Secretary-Treasurer/Chief Cook & Bottlewasher M. Jones be granted a substantial raise.
3. Second your motion.
4. Say "All in favor, say Aye,"
5. Say "Aye."
6. Record this in the minutes.
7. Write yourself a big check.

I am clueless to this...

Oh well, we've all got a few holes in our professional repertoire -- look where you're at on technical expertise/I'm still mulling over buyin' a cell phone. (P.S. Do you think I should upgrade from my Radio Shack TRS-80? Static in the tape recorder's givin' me problems.)

Can you explain the reasoning behind this?

Ahem...well, yes. Since S-corp shareholders don't have to pay social security on company profits (hence the popularity of S-Corps); paying tiny officers' salaries cuts payroll taxes (SS/Med/unemployment) drastically (a nice tidbit). The more bold souls (no salaries at all) kill off the time/trouble/expense of payroll reporting as well as the taxes.

Are we saying it's been determined that certain Salaried people worked TONS of overtime...improperly...?...THAT'S ME!! HELP!!!
Matthew Jones
Tax Preparation
Computer Consultant

Could be -- I'm overworked/underpaid too, but who's a one-man band gonna complain to? Maybe go back to step one and make a motion condemning your treatment of yourself.*

*A single-shareholder corp friend (fighting the AR "unemployment" office) said to me "I'll show 'em. I'm layin' myself off!"

[JG EA]

I would be afraid to incorporate. If I took the net I have now & gave myself that amount as a corp salary - they would audit me for not paying myself enough!

[ChEAr$]

Say Bart!

Just the other day I was upstairs in the "junk" room, looking around to see what I could and/or should toss in the trash. And there's that old TRS80.
Last time Ichecked on EBay there wasn't must of a market for them.

Anybody here want to pay $ 100 for some nostalgia?

[geekgirldany]

If it is the TRS80 Model III they are selling for around $100 on ebay. I use to collect old computers buying them off ebay. Quit after my backroom was full of old computers that I now don't have the time to mess with.

I've got into a position where I've had to put my foot down on the low to no salary. Like I said in my previous post I had to tell the client that he could go to someone else for another opinion if he wants but if he wants me to do his tax returns he will have to start doing a payroll.

My biggest thing is that it is CPAs that are doing this. I then have to explain the difference between me, EA, and a CPA. Gets old after awhile.

This new client, we were discussing his payment to me, he asked if I take distributions... kinda laughing. I told him no because I don't make enough to be incorporated. Which made him blink.

Another potential client had not paid payroll taxes for 15 years. He brought that statement from the social security admin showing how much he had been paying in. He asked why it was all zeros. I told him because he had not been paying in. "CPA told me a S-Corp was a good way to not pay so much in taxes". Well he got his wish.

Also I am not saying it is only CPAs that advise their clients to do this.

[Black Bart]

Same thing with farm losses.

Same here (mine are never checked).

Just the other day I was upstairs in the "junk" room, looking around to see what I could and/or should toss in the trash. And there's that old TRS80.
Last time Ichecked on EBay there wasn't must of a market for them.

Anybody here want to pay $ 100 for some nostalgia?

Thanx but no thanks, Harlan (grin). I was going to sell mine once too, but instead loaned it out and they said they "lost it." (Kinda strange, I thought, but who knows...). I wrote a pretty fair income averaging program in BASIC for it, but the thing kept overheating and would only run for a few hours at a time without going haywire -- had 4K memory.

...CPAs...are doing this. I then have to explain the difference between me, EA, and a CPA. Gets old after awhile.

Yeah, it does get old, doesn't it? And they don't understand any more after you finish explaining than when you started. Bees Knees (I think) once posted a good comeback to that -- he told them "CPAs have a state license and EAs have a federal license" (something like that). That's what I'm going to say to the next one and although I'll probably get a blank stare, I get that anyway after a full explanation the other way.

[JohnH]

Blank stares - some clients seem to look at me that way when they ask the question "what time is it?". Is there any possbility the problem could be the way I answer them?