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Multiple Shareholders Payroll Split

Article ID: 353
Last updated: 24 Nov, 2018
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By Jason Watson ()
Posted November 23, 2018

Many S corporations have multiple shareholders, and several are husband and wife teams. In these cases, we determine a starting point as a collective and then massage from there. For example, using our example above with the $42,000 salary. Perhaps one spouse should be paid $30,000 and the other spouse be paid $12,000 commensurate to his and / or her individual worth to the business. In other words, don’t double the salary once you determine your starting point because you have two shareholders. The starting point is for all aggregated shareholders, and from there you can divvy it up, massage it, increase it, etc.

Remember, this would only be for active shareholders. Please recall from an earlier chapter that you could have your spouse be an inactive investor in your S corporation at 20% and you would remain at 80%. As we’ve mentioned previously, one of the reasonable salary tests is the relationship between salary and shareholder distributions. Therefore, if you own 80% of a business taxed as an S corporation, you are receiving 80% of the distributions. Subsequently, your salary could be possibly reduced (but your salary is still ultimately dependent on you and your value to the business).

Here is a table assuming a 35% jumping off point for salary with a column at 100% ownership and 80% ownership to further explain-

Income

Salary at 100%

Salary at 80%

Payroll Tax Savings

30,000

10,500

8,400

321

50,000

17,500

14,000

536

75,000

26,250

21,000

803

100,000

35,000

28,000

1,071

150,000

52,500

42,000

1,607

200,000

70,000

56,000

2,142

To reiterate, the $100,000 line above would 100,000 x 80% x 35% = 28,000 resulting in a payroll tax savings of $1,071. Note that is a savings of payroll taxes, and not income taxes since the 80% and the 20% would flow presumably onto a jointly filed individual tax return.

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