S Corp Reasonable Pay

10 Replies

Hey Guys!

This is going to be quick- I promise!

I've been told and read that when forming an s corp owners must be paid a reasonable salary and can't just let all of the money pass through and be paid as a dividend (b/c of the lower tax rate). That can be easily determined in a lot of fields but, how exactly does that pan out for a RE investor? What would be a reasonable salary for one in your opinion?

I've had people suggest to me that salary for 1 member should be a function of net income, much like a property manager. Tough question. You could base salary on living wage in your area?

It depends on how you earn income, when I flip I try to use 50% of the income as earned.

You are correct you cannot take all the profits as dividends. As @Jerry W. says, it should take into account how you earn your money. If most of the money is made from the return on investment of the capital in the company, or the efforts of employees, more can be dividends. The more it is becuase of you own efforts the more needs to be salary.

Obviously I suggest you ask your accountant. Perhaps @Steven Hamilton II or other CPA here will chime in.

Check out @Tim Butters link. It spells out the issues pretty well and addresses all of the points I was going to mention. If you want advice specific to your situation, PM me. I can't give a specific answer in a forum like this because someone else might use it and then say they relied on my advice, which could put my license in jeopardy.

@Tim Butters Thanks for posting the article...it was a great read. I go through this with my CPA quite a bit especially with fluctuations of income. A lot of good points in the article and it was good to get a background on the more recent case law. Along with the many items mentioned in the article my CPA stresses that it needs to be reasonable (just like everything IRS related) and that consistency is important. And it really depends on what you are doing and what you are making. Not much to add on my end as the article and other posters covered it!

Originally posted by @John E. :
Hey Guys!
This is going to be quick- I promise! I've been told and read that when forming an s corp owners must be paid a reasonable salary and can't just let all of the money pass through and be paid as a dividend (b/c of the lower tax rate). That can be easily determined in a lot of fields but, how exactly does that pan out for a RE investor? What would be a reasonable salary for one in your opinion?

John E. ,

This is a difficult question. How much time do you spend doing the work? What is a normal salary for such position? Are you flipping and acting as a GC? What is a normal income for a GC in your area? Consider an hourly rate times 2080(number of hours in a typical 40 hour work week)

@Steven Hamilton II Thanks for all of the advice! I definitely don't want to act as a GC. If I don't spend as much time doing the work do I then pay myself less or is it the opposite?

@Daniel DiGiacomo Living Wage sounds like a good idea, but what is a living wage? I've heard a lot of people say that minimum wage isn't enough to live off of and I think I can concur on that one, but how exactly do you define that Daniel? Is it enough to cover my basic living expenses?

@Jerry W. That 50% of net profit as earned income and letting the rest pass through, right? Thanks for the response!

@Tim Butters I'm about to read the article right now- Thanks for the response!

Thanks to everyone else that responded!~ JE

Originally posted by @John E. :
@Steven Hamilton II Thanks for all of the advice! I definitely don't want to act as a GC. If I don't spend as much time doing the work do I then pay myself less or is it the opposite?

@Daniel DiGiacomo Living Wage sounds like a good idea, but what is a living wage? I've heard a lot of people say that minimum wage isn't enough to live off of and I think I can concur on that one, but how exactly do you define that Daniel? Is it enough to cover my basic living expenses?

@Jerry W. That 50% of net profit as earned income and letting the rest pass through, right? Thanks for the response!

@Tim Butters I'm about to read the article right now- Thanks for the response!

Thanks to everyone else that responded!~ JE

Must be reasonable for the work being done. If that of a small business CEO what would an average person in that industry make?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.