How Much Should I Pay Myself?

fair and reasonable salary

Under today’s current tax laws, most of our clients have elected to become S-Corporations for federal income tax purposes. S-Corporations have many advantages over conventional Corporations and Partnerships, which is why they have become so popular. One of the greatest advantages is the ability to make and control distributions of after-tax profits at any point, for any reason. The only caveat that to this is that the owner is taking a “fair and reasonable” salary from the company if they are working in the business. This leads us to one question that I get asked all the time; “How much should the owner’s salary be?” When answering this questions we have to take 3 different considerations into account: future Social Security impact, payroll taxes and IRS guidelines. Social Security and Medicare taxes are calculated at 15.3% of the wage base. The wage base is the lesser of the actual salary or the annual max. (For 2018, the max base is $128,400. Once your salary exceeds that base, no additional SS tax is collected, MC does continue.)  Social Security benefits are calculated using an average of your highest wage base 35 years of employment. There are adjustments for time, but simply put, if you average $100,000/year for 35 years, your Social Security base will be $100,000. The current max Social Security benefit is almost $2,800/month. However, if your average base is $60,000/year, your estimated monthly Social Security benefit will be roughly $2,000/month. As you can see, there is an increase in the future Social Security benefits by maxing out your SS contributions. However, there is a law of diminishing returns – as the dollars contributed go up, the future benefit goes up, but by less and less. If you pay yourself $125,000 this year, you will pay almost $19,000 in payroll […]

December 13, 2018 Blog

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