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What is a Shareholder Salary?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 23 September 2016
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    Conjecture Corporation
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A shareholder salary is a sum paid to one of the shareholder employees of an S corporation, a company that elects to file financial documentation under Chapter S of the Internal Revenue Service (IRS) code. Such companies pass tax liabilities on to their shareholders through the distribution of salaries and dividends, creating a substantial tax savings for themselves. The compensation is usually structured to generate savings for shareholders as well, creating an incentive for becoming a shareholder and receiving a shareholder salary.

In order to qualify as an S corporation, a company must have only one class of stock, with less than 100 shareholders. These include officers of the company, as well as other investors. The shareholder salary must be set at what the IRS describes as “a reasonable amount.” While the IRS does not provide guidance about setting salaries, people can get information from government agencies about salaries for people in similar jobs to determine how much compensation should be provided in shareholder salary and how much should be offered in dividends and other benefits.

The individual shareholder is required to disclose the shareholder salary and pay taxes on it, just like any other income. As a shareholder of a corporation, the taxpayer is not subjected to self-employment taxes and is also not required to submit certain other deductions. The S corporation shareholder can receive varying amounts of compensation depending on the salary set by the company and the dividend distributions.

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Personal income tax forms have a space for shareholder salary, along with other types of income. The company should issue tax documentation providing information about the salary. People can request a new copy if one does not arrive in a timely fashion; the deadline for mailing out such disclosures is usually 31 January. If this paperwork is not sent to the taxpayer, there is still tax liability for earned income, and it is advisable to keep accurate and thorough records in order to submit taxes on time.

In addition to shareholder salary, people are also required to pay taxes on benefits like health care. They can receive compensation in the form of payments into retirement accounts with special tax status, as long as the payments are made and handled appropriately. People who are not sure about their tax liabilities and responsibilities can discuss the situation with an accountant to get more information about how to file taxes appropriately.

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