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If you are doing all of the work, and have minimal financial investment into the business, it seems reasonable that MOST or ALL of the income would be salary.
If you have people working for you, or have a large financial investment into the business (so your money is 'working' for you), then it is reasonable that more profits are allocated to non-salary.
The IRS would agree with AmeliesUncle. it is your personal skill as an appraiser that earns the corporation its income. one way to legitimately avoid having to pay most of the net profits as salary would be to establish a 401K or other retirement plan. if you carry personal health insurance, it may be possible to have the S-Corp pay it. the S-Corp reports this compensation to you and includes it in box 1 of W-2. on your 1040 you get to deduct the health insurance on schedule 1.
comparison: example S-corp income before s/h health insurance and compensation $!00K. salary $70K no health insurance paid. you report on 1040 $70K salary $30K net profit from S-corp. same example except S-corp pays $5K in health insurance for you now $100K less $75k in comp to you (The $70K + the $5K in health insurance). you report on 1040 $75K in salary, $25K net profit from S-corp less $5k deduction for health insurance on schedule 1 (this is the way the IRS says it must be done to get a page 1 deduction for health insurance)
There are no specific guidelines for reasonable compensation in the Code or the
Regulations. The various courts that have ruled on this issue have based their
determinations on the facts and circumstances of each case.
Some factors considered by the courts in determining reasonable compensation:
Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation
Thanks you both for your thoughtful replies. I thought perhaps there was a method to determine how much of the income was business derived vs skill derived. For example, if I worked for a large appraisal firm I might earn a salary of, let’s say, $50k. The firm isn’t in business to purely pass along all the profits to labor, so perhaps they bring in $100k from my employment. Then they pay costs of employment (taxes, workers comp ins, etc). So they might make $15k for the risk associated with being the employer. My understanding was that the S Corp structure was to mimic this division and pay some % of the profit as dividends/non-salary.
Just to clarify my understanding, would you also say that all single employee LLCs should pay most to all as salary? (Lawyers, doctors, real estate brokers, financial planners, and so on?) Or is there something specific about appraisal?
Thank you again for your time!
You ask a fair question.
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