QuickBooks Payroll ServiceAn owner wage, set before any distribution.

The order the IRS page insists on

The IRS compensation page for S corporations says the company pays reasonable compensation to a shareholder who works there, for the services, before non-wage distributions. The amount of compensation will not exceed what the shareholder received. The IRS can reclassify distributions as wages. The page tells you to look at who produced the receipts, including administrative work the shareholder does for other people or for the company's assets. That is the whole test we will sit with. We will not replace it with a percent of profit, because a percent without those facts is how a rule gets invented.

A wage set while the shop is quiet still has to be a wage when the shop is slammed. The distribution that follows it is the line a return will question. Rewriting eleven months of draws in December is a harder talk than a wage that started in March and simply stayed on the roster.

Health coverage is a box question, not a vibe

When the corporation pays health insurance for a shareholder who owns more than two percent, the IRS page says those premiums are reported as wages in box 1 of the W-2 if the plan rules on that page are met. They are not Social Security and Medicare wages in boxes 3 and 5 under the rule the page describes. We re-open the page before a season, because the surrounding notes are long and they move. A site that memorizes a box number and never looks again will eventually be wrong with confidence.

This is also why the provider has to know the person is a shareholder-employee and not a vendor. A payment run through a bill-pay screen does not grow a W-2. The W-2 grows from the roster. If the roster is missing you, the boxes are missing you, and the return will meet a distribution that the page says should have been wages first.

What we will not pretend to know

We will not name a salary on a sales call. We will not say a figure is safe because a friend in the same trade uses it. Trades differ, hours differ, and the person who generated the receipts differs. The conversation needs the year-to-date numbers, a plain description of the work you did, and the other money you already took. With those three, a wage can be chosen and put on the next draft. Without them, any number is theater.

Sole proprietors and partners are a different animal. A draw or a partnership distribution is recorded as that, and it is not dressed up as a wage to look tidy. Tidy and wrong is the combination we are trying to retire. If your company is not an S corporation, say so on the first line of the note and we will not spend the call on a wage you do not have.

The worry owners bring to this page is a letter that reclassifies a year they already spent. The relief is a wage that was boring and regular, so the letter has less to grab. Boring is the compliment.

A year that already paid you in draws

If the year is half gone and every payment to you was a transfer with no wage, the repair is not a December lump that pretends the earlier months were wages. A lump can be a wage only for the period it actually covers, and the provider has to be willing to issue it as wages with the taxes that belong to it. Some years can still be put on a roster before December ends. Some years cannot, because the cash is spent and the dates are a blur. We will say which one you are looking at before anyone builds a paycheck backwards.

Bring the bank lines that were you. Three months is enough to see the pattern. The pattern decides whether a wage can start this month or whether the honest product is a note for the return that describes what happened.