Sole owner of an S corp? Cut your wages and trim taxes

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in Small Business Tax,Small Business Tax Deduction Strategies

If you’re the sole owner of an S corporation, you call the shots. So you can set the salary figures for all employees, including yourself, as long as you stay within the law’s boundaries.

Strategy: Keep your annual salary on the low side. At year’s end, you can pay yourself dividends out of profits.

Why would you skimp on your own salary? You avoid employment taxes on cash distributions from your company, saving literally thousands of tax dollars. Your salary must be “reasonable” under the circumstances or this strategy will backfire (see box below).

Here’s the whole story: The wages paid to you by an S corp are subject to Social Security tax. When you combine the employer’s and the employee’s shares, the 12.4% Social Security portion of the tax applies to the first $106,800 of wages in 2010. The 2.9% Medicare portion applies to all wages.

For instance, if you’re paid $100,000 in wages this year, the combined Social Security...(register to read more)

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