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You Need a Raise

No use paying yourself less. The IRS is cracking down on disguised dividends.

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This story appears in the February 2003 issue of Entrepreneur. Subscribe »

The attraction of electing S corporation status is well-known among entrepreneurs, but there's a potential problem you may run into if your business is organized as an S corp that you may not be aware of. IRS auditors are paying very close attention to the salary that the owners of S corps pay or don't pay themselves.

As you know, S corporation income, losses, deductions and credits "pass through" the business to the owners, to be reported on their individual tax returns. While distributions from the corporation are not subject to FICA withholding, the S corp owner is required to withhold FICA taxes--which amount to a whopping 7.65 percent on the first $87,000 in salary he or she earns in 2003.

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