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Owner wages

Discussion in 'Starting a Business, Incorporation' started by Daniel ray, Feb 16, 2020.

  1. Daniel ray

    Daniel ray Law Topic Starter New Member

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    Jurisdiction:
    Florida
    When starting a multi member LLC that is being taxed as an S Corp, do active members need to take a wage? If so, does this affect their distributions?
     
  2. adjusterjack

    adjusterjack Super Moderator

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    When starting a multi member LLC one would be wise to have a tax pro to whom those questions can be asked.

    And an attorney.
     
  3. Daniel ray

    Daniel ray Law Topic Starter New Member

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    Wow. I sure wish there was a forum to ask legal questions. Oh wait...
     
  4. flyingron

    flyingron Well-Known Member

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    Your question is incomplete and the answer depends on the details you omitted. The general sense is that the answer is yes. If there is income disbursed to people who are performing work for the corporation, a prevailing wage must be paid for the work done (meaning the FICA/Medicare taxes are paid) before treating the balance as dividends (that's federal). In addition, your state will want their pound of flesh for things like the reemployment tax.
     
  5. Daniel ray

    Daniel ray Law Topic Starter New Member

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    I’m an owner and will be doing sales and managing sales reps. Do I take a reasonable wage or only depend on draw
     
  6. army judge

    army judge Super Moderator

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    You should not decide anything until you have consulted with your CPA and your business attorney.

    Taking free advice from people you know nothing about where financial and business matters are concerned can be risky at best, and deleterious to your finances and livelihood at worst.
     
  7. flyingron

    flyingron Well-Known Member

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    I have no clue what "depend on draw" means. You must treat yourself as an employee at the prevailing rate for an S Corp rather than taking all the money as a dividend.
     
  8. Tax Counsel

    Tax Counsel Well-Known Member

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    The rule for S-corporations is that any distributions of money or property from the corporation to members (shareholders) who work for the S-corporation are treated first as wages/salary to the member up to the point where the member has been paid reasonable compensation for all work the member has ever done for the S-corporation. So if the S-corporation does not pay the working member wages during the first year of operation and then makes a distribution to the member at the end of the year, that distribution must be treated as wages/salary to the member up to amount he or she would have received over the year in wages/salary at a reasonable rate of compensation for the work done. Reasonable compensation means what the S-corporation would have had to pay some unrelated person who was not a member of the S-corporation to do that same work.

    For example, suppose Becky is a member of XYZ LLC, which has elected to be taxed under Subchapter S of the Internal Revenue Code (IRC) and thus is a S-corporation for tax purposes. She works for XYZ as a bookkeeper during all of 2018 and 2019. She receives no payments, whether as a salary, distributions or anything else until the end of 2019 when she received a distribution of $150,000. But had she been paid the going rate for bookkeepers in her city she would have been paid $50,000/year, so by the end of 2019 she had provided $100,000 worth of work to the LLC. As a result, when that $150,000 distribution is made XYZ must treat $100,000 of it as a wages to Becky. That means doing the tax withholding that is required, making the matching FICA tax payments, filing the employment tax returns, and issuing to Becky a W-2 for the $100,000 of salary/wages paid. The extra $50,000 would then be treated as a distribution on her stock (member) interest.
     
  9. Tax Counsel

    Tax Counsel Well-Known Member

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    If you take a "draw" that's going to be treated as wages for any work done for which you have not yet received reasonable compensation, as discussed above. So you can't get around the employment taxes by calling the payment a draw rather than salary/wages.
     

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