Flipping LLC being taxed as SCorp

[Katherine Robbins]

Hi everyone, I own a development company that primarily flips houses in MA amongst various other GC and design work. When we started a year ago and a half ago, we were told to structure our business as an LLC and elect to have it taxed as an S-Corp. There are 2 of us with interest in the company (40% and 60% share split). My question is, does anyone else have a similar business structure and if so, do you take your profits from your flips as a distribution or as wages in the form of paychecks? We want to be able to pay ourselves in bi-weekly paychecks but do we split off the Medicaid/SS taxes in doing so or do we not and consider the paychecks as part of our distribution and avoid that tax all together? We plan on considering the side work (GC and design stuff) to be taxable wage income but that is minimal compared to the profit we receive from flipping. We do about 2 flips a year as we're just starting out but once we grow, if we take distributions, then that will be a significant amount of profit/cash that will be avoiding the FICA taxes. In our mind, we setup the company this way to do just that, avoid being double taxed by Business Income and FICA but our accountant is concerned with taking paychecks and not paying the Medicaid/SS out of it and then having to keep track of what side work is considered wages and what's not. Any advice will be helpful!

[Jake Hottenrott]

@Katherine Robbins - You set your company up correctly for your activities, but you need to be taking paychecks.

One of the key things the IRS looks for to open an audit is the lack of reasonable compensation of officers in an S Corp.  Without getting too far into your particulars, your accountant is correct in that you need to be taking wage paychecks (at a level of reasonable compensation) and not just profit distributions.  You need not take all income in paycheck form, but you also can not "avoid" the FICA/Medicare altogether.

Let me know if you have additional questions.