[waltermaj]

I'm a partner in a S corp. We have recently started withdrawals for shareholders. Though we receive salaries, we are concerned about balance. Is it okay that a shareholders yearly withdrawal be larger than the yearly salary? Does this raise red flags with the IRS?

[AtlantaTaxExpert]

That depends on a variety of factors, such as how large are your salaries, how do the salaries match up with the duties performed, etc.

For example, let's assume that a law firm is organized as a S-corporation and has three lawyers (each owning 25% of the shares), with a para-legal who owns 10% of the stock, and three administrative staff who each own 5% of the stock. The firm in the past tax year distributed $800,000 in dividends to the owners based on the percentage of stock owned.

A lawyer could not expect a $20,000 annual salary (while drawing a dividend of $200,000) to go unchallenged by the IRS, because a $20K salary is NOT representative of what a lawyer would make ANYWHERE in the United States.

However, a member of the administrative staff in the same firm who is also owns 5% of the stock COULD draw a $20,000 salary and get a dividend of $40,000 without any scrutiny from the IRS, because a $20K salary for a staff worker COULD be representative of what such staffers would normally earn in that area of the United States.

[Indian CPA]

If you are just a Shareholder and have a passive investment, you do not have to withdraw a salary. If the Shareholder is also an officer, the Corporation should pay a reasonable salary. What is reasonable? - is based on what the person could get paid as salary in if employed and paid by another company.

If the shareholders are the only employees, this becomes even more important.

Indian CPA
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