S Corp Reasonable Salary - Shareholder differences

[strongsilence]

One shareholder (called 'A') wants to limit salary to the SocSec limit (to save PR taxes).  I told him that reasonable compensation doesn't consider this factor; there are other factors.  (He didn't reply to that email.) This salary limit is not the best for the other two shareholders.  Thoughts?

Also, 'A' decided that the CA PTE tax credit was disproportionately disadvantageous as he - 'A' - is the majority shareholder and has to pay more of the company profit toward the California PTE taxes.

[George4Tacks]

Remind me what the S stands for. I think this example you posted sounds like some of those I used to have as clients. May "A "created this "S"?  

Sorry, I know I shouldn't have, but I did. I feeling naughty and not very nice. 

[BobKamman]

Remind me who has employed you -- IRS, or "A" ?  You're right, reasonable compensation considers many factors.  The most important one is how much the guy is willing to accept, and how much he thinks his services are worth.  

Why isn't the salary limit the best for the other shareholders?  Does he want to limit their salaries, too?  Aren't their shares of the profits higher, if his salary is less?

[strongsilence]

Why isn't the salary limit the best for the other shareholders?  Does he want to limit their salaries, too?  Aren't their shares of the profits higher, if his salary is less?

I like how you framed this issue. I will have a conversation with him.

[strongsilence]

Another issue is that shareholder A wants to pay the remaining profits to himself and the other two shareholders as distributions. He doesn't want additional wages paid due to the payroll tax expense.  So, this harms B and C who want to have income taxes withheld on their final paycheck (prorata reduces underpayment penalty) rather than a payment on Jan 15, 2026.  

[sjrcpa]

The shareholders should have worked this out among themselves before 12/18/25.

Curious - what are the ownership % for A, B & C? All shares have voting rights?

[TaxGuyBill]

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@strongsilence wrote:

Another issue is that shareholder A wants to pay the remaining profits to himself and the other two shareholders as distributions. He doesn't want additional wages paid due to the payroll tax expense.

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Are you saying at that Shareholder A does not want to pay its employees?  Is Shareholder A ready for a lawsuit from the employees and potentially a Department of Labor audit?

At first glance, your Shareholder A needs to be (a) educated how corporations work, and/or (b) be fired for incompetence and/or illegal activity.  

[qbteachmt]

While distributions have to be pro rata to ownership position, salaries are for services provided. If one person works less, and wants their salary limited and the balance shifted to distribution, that impacts all distributions, not just theirs. On the other hand, if someone wants their distribution shifted to salary, they also are impacting the other shareholders.

And limiting the wages to the Social Security cap doesn't make much sense, because after the cap, the tax savings kicks in. How does this make sense: "I'd rather be paid less so that my business doesn't have as much expense for wages, which increases taxable profit reported, and now all shareholders get a bigger piece of the money that could have been in my paycheck."

[strongsilence]

In my case, the shareholder has the option to take a distribution of profits of $250,000. But I want him to have an additional paycheck to have the needed withholding to cover his tax liability.   The other two want to take their profits as distributions, not wages.

I have read that disproportionate distributions should be disqualifying only when made pursuant to non-identical governing provisions (i.e., where the governing provisions themselves create unequal rights).  In my case, all provisions in the agreements are equal. 

[strongsilence]

The final observation to share is that I can't seem to advise these three shareholders.  The inter-related aspect of three people and one entity is a puzzle I have not solved.

The primary SH has made it clear that he doesn't want tax planning. Likely he doesn't see my value. He's a Phd in engineering and he thinks he knows tax. (Also, he sees an accountable plan and the CA PTE as unfair because shareholders get unequal benefits.)

The other two should have had taxes withheld on a final paycheck but the PR department wasn't working past yesterday so that didn't get done. Now they need to make a Jan 15 Q4 which means they'll have a penalty, which will make one of them angry.

I'm about to tell them to move on from me.

[BobKamman]

Sometimes these puzzles are called "conflicts of interest" and sometimes there is a complication involved called "ethics."  Make sure to document in writing with all the parties:  1) Who is the client; and 2) what you have been and not been asked to do for that client.  

[strongsilence]

Thanks.

I'll write a memo.

Is it advised for me to have separate conversation about tax choices or one conversation with all three?

I think a different CPA for each shareholder, with me preparing the corporation, will cause me less anxiety.

[qbteachmt]

There's still time to run payroll dated in 2025. You have up to the Dec 31 date, and really, you can backdate it to Dec 31 as long as you are on track with 941/944 timely for that paycheck date.

"need to make a Jan 15 Q4 which means they'll have a penalty"

I'm not sure I understand how this is right. Making an on-time estimated payment against an increased income tax liability due to a distribution isn't going to create a penalty.

[Bruce Nowakowski]

I was thinking the same thing. Its our job to explain the situation and perhaps point out pros and cons of the extremes at both ends as well as the middle ground but its their decision.   The partners ought to come to an agreement and if I was the accountant I would ask for it in writing since at least one of them is in disagreement. 

[strongsilence]

Anyone on this thread want to spend 1/2 hour on the phone with me?  I want to learn to manage this client and with diverging shareholder interests, I don't know what to do.  Will pay $. Direct message me.  

Thank you! 

[TaxGuyBill]

In my opinion, when there is more than one shareholder, compensation needs to be discussed and agreed upon by all (in many cases, ideally at the START of the year).

Increasing the compensation of one shareholder DECREASES the pass-through income (and therefore eligible distributions) of ALL the shareholders.  Unless compensation is agreed upon by all shareholders, arbitrarily increasing wages of one shareholder is effectively stealing income from the others.

If they can't agree, they shouldn't be in business with each other.

There aren't a lot of variable besides the amount of compensation.  Offhand, Section 179 and accelerated depreciation versus not-so-accelerated depreciation is the only thing that I can think of, although very likely there are more things that I'm not thinking of.  For things like depreciation, I would ask if there is an Operating Agreement that shows how the corporation should handle if.  If there isn't an Operating Agreement, I would just do what is best of the shareholder that I am working with.

[BobKamman]

@TaxGuyBill wrote "If they can't agree, they shouldn't be in business with each other."

That's why I discourage partnerships.  One of two things will happen: The business will make money, and the partners will disagree about how to divide it.  Or the business will lose money, and the partners will disagree on who covers it. 

But if they insist, there should be clear rules on how decisions are made.  For corporations, it's not an "Operating Agreement."  That's language for LLCs.  The corporation has a president or CEO, who reports to the Board of Directors.  Who are probably the same three people as the shareholders.  So after a half hour phone call, you would be back where you started.  Two dogs chasing their tails aren't going to solve a problem that one dog alone can't deal with.  

[IRonMaN]

I think there is an ancient Chinese proverb that says that client that does not listen to CPA soon becomes a former client.  Well, if it isn't an ancient Chinese proverb, it certainly is an ancient CPA proverb.  In any case, life is too short to try to convince folks that really don't want to be convinced.

[strongsilence]

Thank you. I struggle with whether he doesn't understand or he is obstinate or thinks he is smarter than I am about taxes. He always asks for my advice but usually doesn't take my advice. So, I need to have another discussion with him.

The issue of "who is my client" arises from the fact that I prepare the returns for all 3 shareholders.  There may be conflicting opinions from each of the three shareholders about wages, distributions, social security, PTE tax credits.

[IRonMaN]

"There may be conflicting opinions from each of the three shareholders about wages, distributions, social security, PTE tax credits."

Majority rules.  Once you get over the 50% of ownership threshold vote, that is what the corporation has decided.  Of course, if you feel that the decision made by that voting block isn't proper, you do have the right to withdraw from the engagement.

[BobKamman]

A corporation can require more than a simple majority (over 50%) for shareholder approval on major decisions, often through its Articles of Incorporation or Bylaws, to protect minority shareholders or control fundamental changes like mergers, sales, or charter amendments, using "supermajority" (e.g., 66.7%, 75%, 90%) or even unanimous votes for critical actions. While state law often sets defaults (like simple majority), these agreements allow for higher thresholds, balancing control with operational necessity.

Or at least, that's what Google AI told me.  And unlike Putin, it seldom lies.  

[strongsilence]

A majority vote would be an interesting vote. Say two of them want $250K wages (for a higher SS benefit) and the third wants $100,000 in wages as he doesn't care about the reasonable compensation rule. I think there would be conflict. I also think these three would find consensus, which probably wouldn't satisfy either of them.

[strongsilence]

when there is more than one shareholder, compensation needs to be discussed and agreed upon by all (in many cases, ideally at the START of the year).

Thank you. TGB.  

arbitrarily increasing wages of one shareholder is effectively stealing income from the others.

I realized this 1 week ago. I wanted for (Shareholder 3) an additional paycheck to cover withholding (pro-rate withholding so he would have an underpayment penalty) and the other two had already deposited their Q4 profit distribution, it was effectively too late.

[IRonMaN]

Sit the three of them in a room, explain where you are coming from and see what happens.  You are not a shareholder so you don't have to get involved a knife fight with any of them if they can't come to an agreement.  Like I said before, life is too short and they don't pay you enough to get stuck in the middle of "family" disagreements.

[BobKamman]

@strongsilence "I wanted for (Shareholder 3) an additional paycheck to cover withholding (pro-rate withholding so he would have an underpayment penalty)  I think you mean NO underpayment penalty

and the other two had already deposited their Q4 profit distribution, it was effectively too late.  Distributions have no effect on Schedule K-1 amounts.  They pay tax on the same amount whether they take it or leave it.

[strongsilence]

Distributions have no effect on Schedule K-1 amounts.  They pay tax on the same amount whether they take it or leave it.

Yes, I knew that. What I didn't say was that I proposed reducing the distribution for SH 3 so he could have another paycheck would have meant disproportionate distributions.

[qbteachmt]

I feel like part of the story line has been overlooked:

"wants to limit salary to the SocSec limit (to save PR taxes)"

Once you hit the limit, there are no more SS taxes, anyway. Limited to the limit or exceeding the limit doesn't change SS.

Medicare is 1.45% and then hits an additional 0.9%.

Fed UI tops out at $7,000.

This whole discussion is over 2.35%?

[strongsilence]

has been overlooked:

Yes, the whole discussion is 2.35%, which comes to about 5-6K (additional income tax and payroll taxes.) Since he wasn't accepting of my offer of tax planning, the shareholder doesn't know this.