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The company in question is an S-Corp. From 1/1 through 7/31, I worked as a W-2 employee for the company. During that time, the company was owned by a single person, who held 100% of the shares. I received normal paychecks through payroll the entire time.

On 7/31, the owner sold me 100% of his ownership stake and exited the company completely, leaving me as the sole owner of the company.

From 8/1 through 12/31, I expect the company to continue earning money. During this time, I'd like to avoid the employer half of FICA taxes incurred by paying myself through payroll. Instead, I'd like to take a year-end profit distribution.

I'm aware of the IRS rule that requires S-Corp shareholders to pay themselves a "reasonable" salary. However, I did receive paychecks from the company for over half the year. Is taking a single profit distribution at the end of the year, without taking payrolls from 8/1 through 12/31, ok in this situation?

Thanks.

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  • I would talk with a CPA, not strangers on the internet for something like this. – Michael Sep 21 '17 at 21:29
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    Oh I plan to. But I’d like to have strangers on the internet contribute their opinions that I can then use to contrast with the CPA’s. – MegaMatt Sep 21 '17 at 21:31
  • I have to ask: Back when you were a non-owner, did you think that your salary was reasonable? – Ben Miller Sep 22 '17 at 1:29
  • Yes. More than reasonable for my industry, really. Put it this way, my salary through 7/31 could pass for an annual salary for the industry. I suppose that’s relevant? – MegaMatt Sep 22 '17 at 1:30
  • Related: What is a reasonable salary for the owner and sole member of a small S-Corp? Note: The top two answers are not in complete agreement. – Ben Miller Sep 22 '17 at 1:33
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From your comment:

My salary through 7/31 could pass for an annual salary for the industry. I suppose that’s relevant?

That information would certainly be relevant if you were the owner since the beginning of the year. If that were the case then I would say you'd be fine skipping the salary for the rest of the year. It would be equivalent to simply front-loading your salary.

However, since you didn't own any part of the company during the time you received the salary, I believe you should think of that salary as if it came from an entirely different company. This means that during the 5 months you owned the company you will have taken $0 in salary, and I believe that would not be reasonable if this job is your main source of income.

As a side note, regarding this statement you made:

During this time, I'd like to avoid the employer half of FICA taxes incurred by paying myself through payroll.

You'd actually be avoiding both the employer and employee portion of FICA, since both sides of FICA are paid for employee compensation. FICA is not paid by either side on company profits.

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  • Thanks for your answer. Perhaps an important point: I reached the SS contribution limit while employed by the company prior to 7/31: my last paycheck from the company had no SS withholdings, though it did have Medicare withholdings of course. Any further paychecks would yield no additional SS withholdings in 2017. – MegaMatt Sep 22 '17 at 11:23
  • @MattPowell - yes, I believe that is relevant. IMHO the IRS is much less likely to care about "avoiding FICA" once SS is maxed out. However, at the same time, you have much less incentive to avoid FICA now too, since you're only saving 2.9% on medicare, or 3.8% if your salary goes over $200K. I'd probably do some amount of reasonable salary and not sweat the 3 or 4%, but nowadays I tend to lean a little conservative with my S-Corp taxes. (I used to lean the other way.) – TTT Sep 22 '17 at 15:59

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