Gyroscopic Investing

dualstow wrote: ↑Wed Feb 08, 2023 8:39 pm
I heard good and bad news for accountants today and yesterday, Vinny.
The bad was just about the rise of A.I.
The good was that there is a shortage of accountants, both for regular customers and for large companies. You’re in demand!

dualstow wrote: ↑Thu Feb 09, 2023 8:56 am
Time to raise your fee?

I Shrugged wrote: ↑Fri Feb 10, 2023 3:11 pm
I can’t view the article, but I’m familiar with the concept. I think your former boss was way too conservative on that.

yankees60 wrote: ↑Fri Feb 10, 2023 9:15 pm

I Shrugged wrote: ↑Fri Feb 10, 2023 3:11 pm I can’t view the article, but I’m familiar with the concept. I think your former boss was way too conservative on that.

I agree. His other partner had no formulas like that for the salary / Sub S split.

Were you a Sub S? If so, what was typically your split?

In recently reading how health insurance owners (and deemed owners) are treated for health insurance premiums paid (and other medical expenses paid) I came across this:

https://www.irs.gov/businesses/small-bu ... nce-issues

Reasonable Compensation
S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The instructions to the Form 1120-S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.


The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation by looking to the source of the S corporation's gross receipts.

The three major sources are:

Services of shareholder
Services of non-shareholder employees or
Capital and equipment
To the extent gross receipts are generated by services of non-shareholder employees and capital and equipment, payments to the shareholder would properly be treated as non-wage distributions that are not subject to employment taxes.

But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.

I Shrugged wrote: ↑Mon Feb 13, 2023 7:00 pm

yankees60 wrote: ↑Fri Feb 10, 2023 9:15 pm

I Shrugged wrote: ↑Fri Feb 10, 2023 3:11 pm
I can’t view the article, but I’m familiar with the concept. I think your former boss was way too conservative on that.

I agree. His other partner had no formulas like that for the salary / Sub S split.

Were you a Sub S? If so, what was typically your split?

In recently reading how health insurance owners (and deemed owners) are treated for health insurance premiums paid (and other medical expenses paid) I came across this:

https://www.irs.gov/businesses/small-bu ... nce-issues

Reasonable Compensation
S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The instructions to the Form 1120-S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.


The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation by looking to the source of the S corporation's gross receipts.

The three major sources are:

Services of shareholder
Services of non-shareholder employees or
Capital and equipment
To the extent gross receipts are generated by services of non-shareholder employees and capital and equipment, payments to the shareholder would properly be treated as non-wage distributions that are not subject to employment taxes.

But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.

I had a Sub S. I and my CPA were comfortable with 5 or more to 1.