S corp reasonable salary

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caligas

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Hi all

I will discuss this with CPA but want some input from others.

We are an S CORP of 40 anesthesiologists. Assuming that average total compensation is in the range of 500-600k, what would be a safe amount to distribute through the S Corp?


MORE IMPORTANTLY: Some folks work a lot less, shareholder distribution has to be the same, but W2 wages will vary. So is “reasonable salary” judged on the aggregate or for each individual? In other words, if 2-3 full shareholders have a very low production, could this be a problem in regards to reasonable salary relative to their full distribution?

Thanks!!
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caligas said:
Hi all

I will discuss this with CPA but want some input from others.

We are an S CORP of 40 anesthesiologists. Assuming that average total compensation is in the range of 500-600k, what would be a safe amount to distribute through the S Corp?


MORE IMPORTANTLY: Some folks work a lot less, shareholder distribution has to be the same, but W2 wages will vary. So is “reasonable salary” judged on the aggregate or for each individual? In other words, if 2-3 full shareholders have a very low production, could this be a problem in regards to reasonable salary relative to their full distribution?

Thanks!!
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When we were a private group many moons ago, when a doc went less than full time we reduced their base proportionately and they sold a portion of their shares back to the company. Voting rights were a big fight. The old bastards wouldn’t budge on that issue. ****heads.
 
Dr. Rude said:
When we were a private group many moons ago, when a doc went less than full time we reduced their base proportionately and they sold a portion of their shares back to the company. Voting rights were a big fight. The old bastards wouldn’t budge on that issue. ****heads.
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Yes, we also have that but we also have folks that officially stay full-time but takes so much vacation and so little call that I start to be concerned about the reasonable salary issue. But I see your point and maybe that is the correct solution.
 
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Distribute $50 stock dividend to each shareholder and adjust the salary proportional to FTE (or however you decide to do it). Save yourself the headache. Don’t get greedy. Ask your CPA. Don’t try to make all your salary as a “capital gain”. IRS doesn’t like when people do that.
 
It seems odd that in your group people who don't work get equal payments.

How much less work are you talking here? Are these people full time call takers, but there is a difference of a few weeks in vacation? Or 1/4 time semi-retired non-call-taking senior cough-dinosaur-cough partners?
 
pgg said:
It seems odd that in your group people who don't work get equal payments.

How much less work are you talking here? Are these people full time call takers, but there is a difference of a few weeks in vacation? Or 1/4 time semi-retired non-call-taking senior cough-dinosaur-cough partners?
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Everyone gets the same distribution, which as I understand, it is the law. What varies is total compensation based on production.

So if distribution total for the year is 100,000 and my W-2 salary is 400k. and you work 2X what I work, your w2 would be 900k. Thus your total comp is 2x mine.
 
caligas said:
Everyone gets the same distribution, which as I understand, it is the law. What varies is total compensation based on production.

So if distribution total for the year is 100,000 and my W-2 salary is 400k. and you work 2X what I work, your w2 would be 900k. Thus your total comp is 2x mine.
Click to expand...

Your going to have to empty the group bank account at the end of the year to avoid taxes .. so I would pay “salary” throughout the year based on productivity , and at the end of the year all shareholders get an equal split of what’s left in the accounts before you zero out for the year as a “bonus” or “distribution” . All of this counts as w2 income to the individual doc btw not capital gains , just part is “salary” and part is “distribution/bonus”
 
caligas said:
Everyone gets the same distribution, which as I understand, it is the law. What varies is total compensation based on production.

So if distribution total for the year is 100,000 and my W-2 salary is 400k. and you work 2X what I work, your w2 would be 900k. Thus your total comp is 2x mine.
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Is there a tax benefit of some kind to taking income as a s-corp distribution instead of regular salary?

If not, then I would think you'd want to minimize the distribution so the non-workers don't get an unearned windfall at the workers' expense.
 
pgg said:
Is there a tax benefit of some kind to taking income as a s-corp distribution instead of regular salary?

If not, then I would think you'd want to minimize the distribution so the non-workers don't get an unearned windfall at the workers' expense.
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Yes there is some tax benefits to s corp distribution.

Really what I’m trying to ask is what do similar anesthesia groups do in regards to how much to pay in distribution, we’ve been doing $100k the rest is w2

Thanks
 
You save on FICA by paying distributions. I’ve spoken to two accountants and they both agreed that paying up to the social security max, which is currently $168,600, and then the rest in distributions should be fine. So you and the company save 2.9% total. $1450/$100,000 adds up over time for you (1.45%).
 
Hoya11 said:
Your going to have to empty the group bank account at the end of the year to avoid taxes .. so I would pay “salary” throughout the year based on productivity , and at the end of the year all shareholders get an equal split of what’s left in the accounts before you zero out for the year as a “bonus” or “distribution” . All of this counts as w2 income to the individual doc btw not capital gains , just part is “salary” and part is “distribution/bonus”
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This is right. It is challenging for an s corp to give "distributions" when its income is basically generated by the direct work of its owners. The IRS would likely make the argument that all the income should be categorized at wages. Therefore all w2. I have spoken to CPAs about this exact scenario. High income w2 gets screwed. There is just no way around it.
 
JOHNBROCHILL said:
This is right. It is challenging for an s corp to give "distributions" when its income is basically generated by the direct work of its owners. The IRS would likely make the argument that all the income should be categorized at wages. Therefore all w2. I have spoken to CPAs about this exact scenario. High income w2 gets screwed. There is just no way around it.
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It depends. As long as your “wages” are reasonable for your profession you should be cool. E.g. awhile back I read about a fantastically successful law firm that paid wages of about $400K for their shareholders but paid distributions of over $1 million. 400K is certainly “reasonable” salary for an attorney.
 
JOHNBROCHILL said:
This is right. It is challenging for an s corp to give "distributions" when its income is basically generated by the direct work of its owners. The IRS would likely make the argument that all the income should be categorized at wages. Therefore all w2. I have spoken to CPAs about this exact scenario. High income w2 gets screwed. There is just no way around it.
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You need a new CPA. Pay a “reasonable” salary, aneftp says $25K is ok, pay the reat as dividends/bonus.
 
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caligas said:
Everyone gets the same distribution, which as I understand, it is the law. What varies is total compensation based on production.

So if distribution total for the year is 100,000 and my W-2 salary is 400k. and you work 2X what I work, your w2 would be 900k. Thus your total comp is 2x mine.
Click to expand...
It is the law, coporate dividends are all the same. Partial owners get partial dividend.
 
Gaseous Clay said:
You save on FICA by paying distributions. I’ve spoken to two accountants and they both agreed that paying up to the social security max, which is currently $168,600, and then the rest in distributions should be fine. So you and the company save 2.9% total. $1450/$100,000 adds up over time for you (1.45%).
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There is also an additional Medicare tax for high earners AND many states have a SALT cap workaround that further reduces the tax you pay on shareholder distributions.

Also some shareholders may benefit from the QBI deduction. Most but not all anesthesiologists are phased out (Upper end of phase out is $483k, so if MFJ taking standard deduction one could make 500k and still partially benefit).
 
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chessknt said:
My CPA said mgma 90th percentile because you are running a successful practice would basically alleviate any audit risk.
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Mgma 90th would mean not much in distribution…

Referencing bureau of labor showed
1724294772506.png


Can also reference what VA salary for anesthesiologist is. I see a job posting for 315-350k
 
linkin06 said:
Mgma 90th would mean not much in distribution…

Referencing bureau of labor showed
View attachment 391081

Can also reference what VA salary for anesthesiologist is. I see a job posting for 315-350k
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You think pointing at a VA salary as a comparison for your profitable private practice gig would pass audit? If you don't get much as a distribution using this method might now be worth doing a S Corp then and all te audit risks that entails.

As a different data point my distribution was about 60% of my income using this method last month after expenses. Ancillary income and favorable insurance contracts vastly outpace the mgma employed pulmonary salary in my region. If anesthesia requires subsidies and these are getting passed on en masse then it will be hard to justify a salary far below what an employee would normally get for the same work.
 
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linkin06 said:
Mgma 90th would mean not much in distribution…

Referencing bureau of labor showed
View attachment 391081

Can also reference what VA salary for anesthesiologist is. I see a job posting for 315-350k
Click to expand...
This is what I do with locums.

Annual salary is tied to what a VA doc would make x 1.25 fudge factor 300k *1.25 = 375k/12 = 31k/month gross income. everything above that is distribution. Basically I am paying the employee (me) a flat salary to make the business (LLC) a profit of anything beyond the 31k/month, which is on average about 80-85k/month.

distribution is 50-55k, less all applicable taxes and retirement contributions.
 
Status Sciaticus said:
This is what I do with locums.

Annual salary is tied to what a VA doc would make x 1.25 fudge factor 300k *1.25 = 375k/12 = 31k/month gross income. everything above that is distribution. Basically I am paying the employee (me) a flat salary to make the business (LLC) a profit of anything beyond the 31k/month, which is on average about 80-85k/month.

distribution is 50-55k, less all applicable taxes and retirement contributions.
Click to expand...
Just so I’m clear is the distribution really a bonus taken as w2 or is it something else?

Is the sole purpose of calling it a distribution to save FICA? Are there any other benefits?
 
JOHNBROCHILL said:
Just so I’m clear is the distribution really a bonus taken as w2 or is it something else?

Is the sole purpose of calling it a distribution to save FICA? Are there any other benefits?
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Distribution and dividend seem to be used interchangeably sometimes. Less taxes, whatever you call them. “Bonuses” are typically income in excess of your salary and are taxed as W2 income.
 
Arch Guillotti said:
Too high.
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Their argument is I am also doing admin work running the business and that needs to be compensated as well which seemed fair to me. If you are literally just going to work and paying someone else to handle contract negotiation/logistics etc I could see going with MGMA median. I don't think using the VA as the standard as remotely 'reasonable' though especially with distributions being 3x your salary.
 
JOHNBROCHILL said:
Just so I’m clear is the distribution really a bonus taken as w2 or is it something else?

Is the sole purpose of calling it a distribution to save FICA? Are there any other benefits?
Click to expand...
It is a payment made to shareholders of an S corporation as profit in the business. It does not included in W-2 salary, but it is part of your earned income. It is exempt from payroll taxes so you save 2.9% on the Medicare tax +0.9% of additional Medicare tax. If you live in a state with a SALT work around you get additional savings. If you are not phased out of the QBI deduction, you get additional savings here as well.
 
chessknt said:
Their argument is I am also doing admin work running the business and that needs to be compensated as well which seemed fair to me. If you are literally just going to work and paying someone else to handle contract negotiation/logistics etc I could see going with MGMA median. I don't think using the VA as the standard as remotely 'reasonable' though especially with distributions being 3x your salary.
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Just make it $250K. I am sure there are jobs somewhere that pay this. My taxes are clean as a whistle and I wouldn't worry too much about being audited for claiming what can be considered a "low" number as long as it isn't in aneftp range.
 
I don’t think IRS wants to be trying to determine what is reasonable or not. They have explained what clearly is unreasonable ($0 to very very low salary) but it seems to be left intentionally vague with some guidelines.

You’re still paying the income tax on the distributions
 
Anybody know how BLS data is collected? If you want to pay yourself a low salary, those are the numbers to use. It’s government data. I doubt the IRS would dispute their numbers.


www.bls.gov

Anesthesiologists

www.bls.gov www.bls.gov
 
caligas said:
Yes there is some tax benefits to s corp distribution.

Really what I’m trying to ask is what do similar anesthesia groups do in regards to how much to pay in distribution, we’ve been doing $100k the rest is w2

Thanks
Click to expand...
Minimum is 180k that you have to have for w2 as reasonable income for tax purposes. But I'd be careful. IRS came down hard on a big private practice group for doing minimum W2 and taking the rest as distributions.
 
ans2021 said:
Minimum is 180k that you have to have for w2 as reasonable income for tax purposes. But I'd be careful. IRS came down hard on a big private practice group for doing minimum W2 and taking the rest as distributions.
Click to expand...
What salary were they giving themsleves? What happened?
 
nimbus said:
Anybody know how BLS data is collected? If you want to pay yourself a low salary, those are the numbers to use. It’s government data. I doubt the IRS would dispute their numbers.


www.bls.gov

Anesthesiologists

www.bls.gov www.bls.gov
Click to expand...
This is a good one.

Some states has franchise tax on the dividend (CA, IL 1.5%). It makes S-corp not as attractive. SALT deduction workaround will expire by the end of next year. Depending who will be the President, very likely not extended.
 
Arch Guillotti said:
What salary were they giving themsleves? What happened?
Click to expand...
From what I've heard, some were taking lower, around 100k as their W2, which my CPA said isn't even allowed. There was other shady stuff going on which triggered the audit. However, partners that were following exactly what their CPA said, and took a low W2 (180ish), had to backpay thousands in taxes.
 
ans2021 said:
From what I've heard, some were taking lower, around 100k as their W2, which my CPA said isn't even allowed. There was other shady stuff going on which triggered the audit. However, partners that were following exactly what their CPA said, and took a low W2 (180ish), had to backpay thousands in taxes.
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people are just dumb and extremely aggressive about cheating on their taxes.
One of the good things about the underpaid VA docs is that you can use their salary average and pay yourself that amount. I cant imagine they would come back and say that compensation is unreasonably low.
 
Status Sciaticus said:
people are just dumb and extremely aggressive about cheating on their taxes.
One of the good things about the underpaid VA docs is that you can use their salary average and pay yourself that amount. I cant imagine they would come back and say that compensation is unreasonably low.
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Ive used 220,000 in the past, but the reason being I wanted to take the max sep IRA contribution which was 55,000 at the time. I think any amount less that 200 for full time hours won't stand up to scrutiny if the IRS looked. I'd be cautious getting too aggressive with deductions. There's a good case you can Google about the Augusta deduction. a group of doctors used it, the IRS sued and they ended up losing in court and have to pay like 250k each or something in back taxes.
 
ans2021 said:
From what I've heard, some were taking lower, around 100k as their W2, which my CPA said isn't even allowed. There was other shady stuff going on which triggered the audit. However, partners that were following exactly what their CPA said, and took a low W2 (180ish), had to backpay thousands in taxes.
Click to expand...
That’s too low. I was taking 100-130k w2 but that was back in 2005-2014 era as s corp. fica limits were around 80-100k. Govt wants their payroll taxes 15.6%

With inflation You gotta be around 220k since fica limits around 160-170k these days. They don’t know if you are anesthesiologist or speciality.

Crnas were taking 50k s corp salary claiming nursing as their profession.
 
I agree with a fair W-2 wage of $200,000-$220,000. The remainder can be K-1 distributions after all your deductions including Cash Balance Plan, 401K contributions, profit sharing etc.

Now, if you have a ton of deductions could you take a lower salary like $180,000? Yes. The key is your salary should be 50% of the earnings. For example, $180,000 W-2 and $180,000 K-1 with the remainder being deducted. Will that pass IRS muster if you get audited? I think it will.

As a full time Anesthesiologist you should be ABOVE the FICA threshold for that year. This means if the maximum FICA is $180,000 then you should declare no less than $180,000 W-2. That is the bare minimum in my opinion as the IRS expects at least that much.
 
That is what my CPA was stating too, that if you are above the FICA min, IRS less likely to be wary. I used a combo of VA and BLS data, adjusted for inflation over the years, I think I could justify it reasonably.
 
Keep in mind that for DB plans the lower your w2 salary the less you get to contribute (up to the IRS max of 350ish) so there is more to the calculus than the lowest w2 possible depending on what you are doing.
 
aneftp said:
That’s too low. I was taking 100-130k w2 but that was back in 2005-2014 era as s corp. fica limits were around 80-100k. Govt wants their payroll taxes 15.6%

With inflation You gotta be around 220k since fica limits around 160-170k these days. They don’t know if you are anesthesiologist or speciality.

Crnas were taking 50k s corp salary claiming nursing as their profession.
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That's key. Depending on your income, you can assume the IRS sees you as a number rather than an anesthesiologist with xyz skills or business acumen to get locums work. Don't be too outside the guardrails and you'll be fine. I plan to do 250k for reasonable salary.

200k is where additional medicare tax kicks in. A small cushion above that gives the government their pound of flesh.
 
For those that do 1099 work in addition to W2, when does is the juice worth the squeeze of starting an S corp vs not? Let’s assume we’re in a high tax burden state.
 
lolnotacop said:
For those that do 1099 work in addition to W2, when does is the juice worth the squeeze of starting an S corp vs not? Let’s assume we’re in a high tax burden state.
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Usually not much savings if have 500k w2 and 200k 1099 to have a crop

Not much benefit since your real savings are on the Medicare tax savings.

Some people get creative with tax savings with s corp. lending money to yourself in the s corp.

Employing their young kids with menial jobs and tax shelter more income into their retirement.
 
aneftp said:
Usually not much savings if have 500k w2 and 200k 1099 to have a crop

Not much benefit since your real savings are on the Medicare tax savings.

Some people get creative with tax savings with s corp. lending money to yourself in the s corp.

Employing their young kids with menial jobs and tax shelter more income into their retirement.
Click to expand...
Yeah. But you might eek out another 1-2 percent if in a SALT cap workaround state.
 
caligas said:
Yeah. But you might eke out another 1-2 percent if in a SALT cap workaround state.
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Correct. If u live in state income tax state it’s more beneficial. The salt cap workaround is a mess.
I’m in Florida so really don’t have to deal with that. (The salt workaround cap) since no state income tax

People say the trump tax cuts didn’t raise tax revenues for the us govt. it’s really did raise tax revenue.

No deduction for alimony
No moving deductions
10k salt cap (not index for inflation) (I think)

He did increase the standard deduction a lot.

That’s why I say both these politicians don’t really give a crap about us. Those making 230k and up single and 500k and up married who actually have to work do bare a lot of the tax burdens in this country.
 
aneftp said:
Correct. If u live in state income tax state it’s more beneficial. The salt cap workaround is a mess.
I’m in Florida so really don’t have to deal with that. (The salt workaround cap) since no state income tax

People say the trump tax cuts didn’t raise tax revenues for the us govt. it’s really did raise tax revenue.

No deduction for alimony
No moving deductions
10k salt cap (not index for inflation) (I think)

He did increase the standard deduction a lot.

That’s why I say both these politicians don’t really give a crap about us. Those making 230k and up single and 500k and up married who actually have to work do bare a lot of the tax burdens in this country.
Click to expand...
That’s true. Either way we get taxed a lot. But why cut the corporate tax then? They got most of the benefits, we got lip service.
 
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