For a small business S-Corp, the owner was taking a paycheck but then stopped because they couldn't afford to take a paycheck.

[enjoyfinances]

The owner can't take distributions during that time, but what is the best procedure for when they are ready to take a paycheck again? If they didn't take any distributions, can they simply resume taking a paycheck?

Also, if they did take distributions, then what does the owner need to do, once they're ready to resume taking a paycheck?

[NeilM7]

When it comes to reasonable compensation for a shareholder-employee of an S Corporation, the IRS isn't concerned about the net income or loss from the business but will focus on distributions made to the shareholder-employee.

If the S Corp didn't make any distributions to the shareholder-employee (regardless of net income/loss) then reasonable compensation isn't an issue. The amount of reasonable compensation that the IRS could reclassify from distributions made will never exceed the amount received by the shareholder-employee, directly or indirectly. Therefore, if the S Corp lost money (had a net loss) but made distributions to the shareholder-employee, then the shareholder-employee should have received reasonable compensation at least equal to the distributions.

As far as resuming payroll, first determine what is reasonable compensation for the shareholder-employee and then resume normal payroll activities as before.

Here is a link to the IRS that discusses S Corp Compensation & Other Issues:  https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

[jashley]

Shareholders who actively participate in the management of an S-corp must take a reasonable compensation.  Reasonable compensation is usually calculated by how much you would pay an employee for doing the same type of work.

If there were no distributions then there would be no transactions to reclassify to wages.  If there were distributions, then the IRS may reclassify the distributions to wages depending on the facts and circumstances that existed at the time when services were rendered.

Once it is reasonable to do so, the shareholder can resume a normal paycheck.