You ask a fair question.
- You reference a single member LLC. If it is just a single member LLC, then it is a disregarded entity for federal income tax purposes and everything will be reported on a Schedule C. Schedule C businesses do not pay out a salary and everything is subject to self-employment tax.
- You made the decision to make an S election, and as such, need to play by those rules. Meaning you will need to be paid a reasonable salary.
- Most lawyers and the other businesses you mention could be structured in a variety of ways depending on how many employees / owners there are. This can make a significant difference.
- Additionally, many law firms are structured as an LLC / LLP / LLLP where there is no salary allowed to be paid. Owner's of these structures are paid out a guaranteed payment, which is similar to a wage, although no W-2 reporting or withholding at the entity level. The guaranteed payment is subject to self-employment tax.
- There is no technically correct answer to your question, as this is always a facts and circumstances test. I think as long as your salary is reasonable, based on a methodology, if audited, you will most likely be ok. This is a hot area with the IRS and just keep in mind the saying pigs get fatter and hogs get slaughtered. Meaning, don't pay out a low salary and take out most in distributions. You won't win that battle with the IRS.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
