S corp question salary to wife

[ljwalters]

If husband and wife have an s corp. and both are 50% ownership. Do they both have to take a salary?

Clients both own and work in the pool cue business. Husbsand builds the cues and takes a salary. Wife does inlays but does not takes salary.

how is the income to wife reported.

I'm confused.

also, business at a loss this year, but not always.

[jainen]

>>how is the income to wife reported<<

On Form W-2.

[OldJack]

IRS has authority to reclassify "draws/distributions or other payments to a shareholder" if the shareholder has not taken a reasonable salary for the work performed by the shareholder. If wife has taken nothing out of the S-corp, she does not have to take a salary.

[jainen]

>>If wife has taken nothing out of the S-corp, she does not have to take a salary.<<

That's not the way I read Section 1366(e). "If an individual who is a member of the family... of one or more shareholders of an S corporation renders services for the corporation... " In other words, if the wife works there she MUST get a reasonable wage, period. Otherwise hubby could take a little salary and a great big dividend or max out FICA, etc.

[Randall]

By giving them both salary reported on W2, they both get Social Security creditand they both can be eligible for retirement plans.

[OldJack]

>>If wife has taken nothing out of the S-corp, she does not have to take a salary.<<

That's not the way I read Section 1366(e). "If an individual who is a member of the family... of one or more shareholders of an S corporation renders services for the corporation... " In other words, if the wife works there she MUST get a reasonable wage, period. Otherwise hubby could take a little salary and a great big dividend or max out FICA, etc.

You read it wrong. It states making an "adjustments in the "items" taken into account by such individual or shareholders". If there are no items (payments) there is no adjustment the IRS can make.

>>(e) Treatment of family group

If an individual who is a member of the family (within the

meaning of section 704(e)(3)) of one or more shareholders of an S

corporation renders services for the corporation or furnishes

capital to the corporation without receiving reasonable

compensation therefor, the Secretary shall make such adjustments in

the items taken into account by such individual and such

shareholders as may be necessary in order to reflect the value of

such services or capital.<<

[ljwalters]

She took no income because there was no money. Corp has run at a loss for 2 years now. The economy het them hard.

[Jack from Ohio]

Bottom line - No profit, no problem with the wages or the IRS.

[Medlin Software, Dennis]

One item to add, when there is income/profit, make sure to meet the minimum pay frequency requirements for the state (if any). An owner/employee still has to be treated like any other employee. For example, in CA, employees (owner or not), with a few exceptions, must be paid at least twice a month. I hear fairly often from folks who are owner/employees paying themselves once a year, once a quarter, or something else not allowed by their state.

[kcjenkins]

That is a good point, especially in states that are known to be aggressive over payroll taxes. They want their share, and they want it as soon as possible!

Thankfully, not all states have such requirements, but if your state does, you should always warn your clients to comply. So often, owners want to wait till the end of the year, or close to it, to decide how much they can afford to take out for themselves, since owners get paid last in most small businesses.

Do you have a list of states with such a requirement?

[Gail in Virginia]

http://www.dol.gov/w...ayday.htm#foot2 You might try this web page for a chart on the US DOL site. I make no guarantees as to accuracy.

[kcjenkins]

Thanks, I'd never seen that link. Useful to have though.