I have an S Corp, and I pay myself a salary.
If a friend wanted to invest in my group, and offered to by 30% of my shares, but wasn't going to actually do any work for the company, would they still need to be paid a salary before they are paid any distributions?
Or is this type of setup not something that you can do with an S Corp?
In your facts and circumstances, i.e. the new minority owner will not be actually performing services for the S corp, no salary is mandated.
Christmas ChEAr$, Harlan Lunsford, EA n LA
I don't do returns, so my understanding may not be complete. But I believe S-corp compensations can be divided between what is in effect salary (that self-employment tax is due for) and what is in effect a divident (that there is no self-employment tax on).
In this case the working shareholder can take a reasonable salary, and the balance is divided between the shareholders based on their relative shareholdings.
Stu
Thanks Guys.
Just to be clear -- S corporation stockholders are not subject to self- employment tax. Instead, to the extent that there are earnings to pass through to the stockholders, those stockholders that perform services for the corporation must be treated as employees and paid a salary reasonably commensurate with the value of the services they provide. Stockholder-employees receive W-2s and are subject to FICA and other employment taxes. The S corporation pays the employer half of FICA and withholds the employee's half from the stockholder- employee's paychecks. Stockholder-employees' salaries are deducted in arriving at net income that is divided among all shareholders according to their ownership interests (their distributive shares).
A stockholder who performs no services for the corporation is not treated as an employee, and his or her distributive share of income is not subject to self-employment tax. Yet.
Katie in San Diego
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