S-Corp owners: Bonus payments vs salary
S-Corp owners: Bonus payments vs salary
I have to deal with the good outcome of excess income this year, although the salary that I was taking based on previous years income is looking inadequate. I believe the current salary may still meet the reasonable pay requirement, although my comfort level with this says take a substantially higher salary since there is an excess of $100k projected this year. The only reason for not averaging it through the year is the uncertainty that income will continue to end of year, coming to final stretch it is all but certain.
So, that brings me to the question what is the best way to do this? increase salary for the last 3 months by adding a Bonus payment line item to the paycheck sounds like the way to do. I understand that both Salary and Bonus will treated same way for taxable income and this is the intent, and for reporting purposes there will be no separate lines. However, from an internal record keeping purposes, I can show that the Salary remains same while Bonus component was introduced to distribute unexcepted higher income. I expect to bump up the regular salary going into Jan 1 2022, although not by the same amount as bonus component.
Alternatively, I could just take all that as dividend distribution, but with a concern that it may lead to scrutiny. The bonus payment will bump me over SS limit this year and allow maximum contributions to solo 401(k)/profit sharing.
What do others do in similar situation?
So, that brings me to the question what is the best way to do this? increase salary for the last 3 months by adding a Bonus payment line item to the paycheck sounds like the way to do. I understand that both Salary and Bonus will treated same way for taxable income and this is the intent, and for reporting purposes there will be no separate lines. However, from an internal record keeping purposes, I can show that the Salary remains same while Bonus component was introduced to distribute unexcepted higher income. I expect to bump up the regular salary going into Jan 1 2022, although not by the same amount as bonus component.
Alternatively, I could just take all that as dividend distribution, but with a concern that it may lead to scrutiny. The bonus payment will bump me over SS limit this year and allow maximum contributions to solo 401(k)/profit sharing.
What do others do in similar situation?
Re: S-Corp owners: Bonus payments vs salary
If your salary is reasonable for the job, then you should take excess income as a distribution, not as compensation.
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Re: S-Corp owners: Bonus payments vs salary
What did your CPA advise? We’ve always relied on the advice of our CPA when it comes to matters like this with our S Corps.
Being wrong compounds forever.
Re: S-Corp owners: Bonus payments vs salary
+1 Best advice. I always consulted with my CPA on these matters.Wanderingwheelz wrote: ↑Sun Sep 19, 2021 8:34 am What did your CPA advise? We’ve always relied on the advice of our CPA when it comes to matters like this with our S Corps.
Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Re: S-Corp owners: Bonus payments vs salary
Not addressing the necessity, the easiest way to increase your salary at the end of the year is via a bonus.
Re: S-Corp owners: Bonus payments vs salary
I have a one-person S-Corp. If you are interested in maximizing 401(k) contributions, what I have done is calculate a year end bonus that increases total salary for the year in a way that a) maximizes the 25% allowable profit sharing contribution and b) reduces company profit to zero.
However, as others have mentioned, you may want to consult a CPA for guidance.
(Side note: I’ve done the same under a C-Corp)
However, as others have mentioned, you may want to consult a CPA for guidance.
(Side note: I’ve done the same under a C-Corp)
Re: S-Corp owners: Bonus payments vs salary
There really isn't any difference between salary and bonus, but I would prioritize the 401k contributions. So a single year end employee bonus of $19.5 (or $26K if over 50) that all gets deferred to the soloK would be a good move, this should also help alleviate some concern about "reasonable compensation" if you think that's an issue for you. If your current salary plus the deferred bonus would put you over the SS wage base I don't think you need to worry about that.
There's nothing wrong with taking it as a distribution except that you can't get the distribution into the soloK. So max that out first.
There's nothing wrong with taking it as a distribution except that you can't get the distribution into the soloK. So max that out first.
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Re: S-Corp owners: Bonus payments vs salary
This is what I do as well, in consultation with my CPA.CalPoppy wrote: ↑Sun Sep 19, 2021 12:03 pm I have a one-person S-Corp. If you are interested in maximizing 401(k) contributions, what I have done is calculate a year end bonus that increases total salary for the year in a way that a) maximizes the 25% allowable profit sharing contribution and b) reduces company profit to zero.
However, as others have mentioned, you may want to consult a CPA for guidance.
(Side note: I’ve done the same under a C-Corp)
Re: S-Corp owners: Bonus payments vs salary
Thanks for the suggestion to do single year end bonus, that makes sense. As to the CPA advise, yes I do have a CPA who does basic tax filing service.
EDIT: I spoke to my CPA and received advise on how best to handle this.
EDIT: I spoke to my CPA and received advise on how best to handle this.