In this article, we give some ideas you can take into consideration when determining your salary as an S-Corporation owner. These suggestions are based on you already having a basis for determining what your reasonable compensation range would be based on the factors we discuss in our previous article, “Reasonable Compensation – What No One is Talking About”.
1. Consider pension benefits your S-Corporation can pay you. For example, if your S-Corporation creates a SEP IRA retirement plan, your company would be able to contribute a deductible, 25% of your compensation or a maximum of $61,000 (for year 2022). If your salary is too low, however, you can’t maximize your pension benefits.
2. Check with Social Security to determine if you have paid in enough credits to be eligible for benefits. Second, the amount of your benefits takes into consideration your highest 35 years of salaries. If your income has been low, then you can consider taking a higher salary to help increase your future benefit amount.
3. The amount of payroll taxes is most often considered with many S-Corporation owners seeking to keep this amount as low as possible. Consider if your reasonable compensation range is $130K to $150K, the maximum amount of wages you’ll pay social security tax of 6.2% on is $142,800. Over this amount, you will continue to pay Medicare tax of 2.9%. However, if paying yourself over this amount will increase your pension contribution, you could save up to 37% in taxes since your S-Corporation will be able to deduct the amount of its’ contribution to the pension.
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