ISSUE NO. 65 WEEKLY CFO BRIEF A practical weekly field note from Basta CPA.

THIS WEEK'S STORY

How Much Should an S Corp Owner Actually Pay Themselves?

Samy Basta, CPA

Carlos runs a foundation and concrete business down on the Peninsula. He came to me last fall after his longtime CPA retired.

First thing I pulled was his W-2. One hundred sixty-five thousand dollars ($165,000).

I asked how he landed on that number.

"My old guy told me to pay myself a real salary so the IRS leaves me alone."

So he did. Three years running.

Reasonable compensation is not the biggest number you can stomach. It is what you would pay somebody else to do your job.

So I asked Carlos what his job actually is. He does not pour concrete anymore. He estimates, he bids, he runs two crews, he handles the client calls. We priced each of those roles against wage data for his trade in his county. The number came in near one hundred twelve thousand dollars ($112,000).

He had been running fifty-three thousand dollars ($53,000) a year through payroll that belonged in distributions.

Both halves of payroll tax on that is roughly eight thousand dollars ($8,000) a year. Three years of it, and payroll tax is hard to claw back.

Now the other direction, because it is worse. In Watson v. United States, an owner paid himself twenty-four thousand dollars ($24,000) a year while taking distributions over two hundred thousand ($200,000). The court set his real wage at ninety-one thousand forty-four dollars ($91,044) and reclassified the difference as wages. He owed the back payroll tax, plus penalties and interest.

There is no formula. No sixty-forty rule, no percentage of profit. Anyone who quotes you one is guessing.

Here is how I set it.

• What would you pay a person to do each piece of your job?
• How many hours do you actually work in the business?
• What does that work pay in your county?

Answer those, then write the reasoning down and date it before payroll runs, not after a letter shows up.

Quick note from your CFO​ ​Carlos pays himself one hundred twelve thousand dollars ($112,000) now, with a one-page memo behind it. So pull your last W-2 this week. Then ask what you would pay a stranger to do your job.

Fix My CFO Rhythm

— What I Would Check This Week

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•✓•

Pull your last W-2 and set it next to your total distributions. Look at the gap between the two. A small salary sitting next to large distributions is the pattern that draws attention, and it is visible on the return before anyone reads a word.

•✓•

Write down what your job actually is. List the roles: estimating, bidding, supervision, sales, hiring. Most owners find they stopped doing the trade work years ago and never adjusted the salary. You cannot price a job you have not defined.

•✓•

Find wage data for those roles in your county, not the national average. A superintendent in San Mateo County and one in Fresno are not the same number. California pay is why your salary should be higher than what a Texas blog post tells you.

•✓•

Ask whether anyone documented your salary before payroll ran. A one-page memo with the roles, the hours, the comparable wages, and the date. Watson had no documentation and lost. The memo costs an hour and it is the whole defense.

— Deep Dive

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01

Run the numbers before choosing an S-corp The tax savings may disappear once you factor in a reasonable salary, California taxes, payroll, and added accounting costs, especially when profit is low or unpredictable. ​Read more →​

02

Your team is busy, so where is the profit going? A project can keep everyone working while extra requests, burned hours, and delayed billing quietly eat through the fee before anyone notices. ​Read more →​

03

Separate your cash from client deposits before you spend it Client deposits can make your bank balance look healthy, but the Four Cash Buckets reveal what is already committed to vendors, taxes, refunds, and operations. ​Read more →​

Basta and Company

100 Pine Street, Suite 1250
San Francisco, CA 94111

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