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.