Do I need to pay myself a salary if I switch from S-Corp employee to shareholder mid-year?
The company in question is an S-Corp. From 1/1 through 7/31, I worked as a W-2 employee for the company. During that time, the company was owned by a single person, who held 100% of the shares. I received normal paychecks through payroll the entire time.
On 7/31, the owner sold me 100% of his ownership stake and exited the company completely, leaving me as the sole owner of the company.
From 8/1 through 12/31, I expect the company to continue earning money. During this time, I'd like to avoid the employer half of FICA taxes incurred by paying myself through payroll. Instead, I'd like to take a year-end profit distribution.
I'm aware of the IRS rule that requires S-Corp shareholders to pay themselves a "reasonable" salary. However, I did receive paychecks from the company for over half the year. Is taking a single profit distribution at the end of the year, without taking payrolls from 8/1 through 12/31, ok in this situation?
Thanks.
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From your comment:
My salary through 7/31 could pass for an annual salary for the
industry. I suppose that’s relevant?
That information would certainly be relevant if you were the owner since the beginning of the year. If that were the case then I would say you'd be fine skipping the salary for the rest of the year. It would be equivalent to simply front-loading your salary.
However, since you didn't own any part of the company during the time you received the salary, I believe you should think of that salary as if it came from an entirely different company. This means that during the 5 months you owned the company you will have taken [CO] in salary, and I believe that would not be reasonable if this job is your main source of income.
As a side note, regarding this statement you made:
During this time, I'd like to avoid the employer half of FICA taxes incurred by paying myself through payroll.
You'd actually be avoiding both the employer and employee portion of FICA, since both sides of FICA are paid for employee compensation. FICA is not paid by either side on company profits.
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