S Corp Salary - no income


My startup is at the stage where I'm considering forming an LLC, S-Corp or C-Corp. I've been reading a lot, on this site and others, about the various advantages and disadvantages of the 3 main approaches, and I have a specific question about an S-corp. (Which may apply to the other structures also, I just don't know.)

A very SEO friendly website, which also sells incorporation kits and incorporation pamphlets mentions that S-corps must pay a "reasonable salary" to the shareholder-employees. Not doing so really raises the risk of an IRS audit.

We are an early stage startup, I'm the only full-timer, and only 1 other person is working half time (there is a small assortment of others working less than half time)

We are so early stage that we do not have any income, indeed, our product isn't even in the alpha stage yet and income could be far away. I don't anticipate having sufficient income this year to pay a reasonable salary to all the employee-shareholders. Time and time again the websites I've visited say "Nobody works for nothing. Well, we do. We work for equity."

So how can I pay a salary without sales? Clearly I can't, so how can I avoid IRS trouble?

Incorporation Salary S Corp

asked Jan 12 '12 at 02:14
Paul Cezanne
649 points

1 Answer


This IRS article has a good explanation:
Wage Compensation for S Corporation Officers The key phrase for you:

The amount of the compensation will never exceed the amount received
by the shareholder either directly or indirectly.
However, if cash or
property or the right to receive cash and property did go the
shareholder, a salary amount must be determined and the level of
salary must be reasonable and appropriate.

So, if you are taking no compensation because the company is not making revenue, it's perfectly ok to have no salary.

You will get in trouble if:

  1. Your company is compensating you (dividends, expenses, a company car, health care plan, etc.)
  2. You work for the company
  3. You didn't show any "wage" income.

They just don't want you to get paid, and avoid paying FICA, Social Security, Unemployment Insurance, etc.

Disclosure: I am just some guy on the internet. When you start making money, hire an accountant :)

answered Jan 12 '12 at 07:26
293 points

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Incorporation Salary S Corp