S Corp Salaries? Do you have to?

[Jacob Wiltshire]

Hello,

I recently purchased a mixed use property for $390K. Gross income of about $76,800 right now.

Income: $76,800

Taxes: $9,344.68 (from which one tenant pays back $2251)

Insurance: $5,108.00 (from which one tenant pays back $864)

Mortgage: $2265.18 monthly (20 year term on $360K at 4.35%).

I plan to put away 5% each for vacancy, capex and repairs and maintenance.

Other monthly costs:

Water $200

Garbage $96

Electricity $50

Termite protection: $22

Following all of this our total estimated annual cash flow is $23,036. There are two members in the LLC including myself.

My partner has been taking about us making our LLC as S Corp. He has been told that we can do that without paying salary given we are low income.

What are your thoughts? Is this a model where if we switched to S corp we wouldn’t need to pay salary? To be it seems like we still would have to do that.

[Natalie Kolodij]

I literally had a T shirt made this week that says "no rentals in S corps" 

Rentals don't pay self employment tax. 

S corps allow self employment tax savings by allowing you to take a reasonable salary, and then the remainder of the income isn't subject to self employment tax. 

But again- your rentals...don't pay self employment tax. 

So in short: 

Yes a reasonable salary is required. 

It would be converting income that doesn't pay any payroll taxes, into income that does pay payroll taxes. 

Additionally 

If when you ever transfer that property out of the S corp- even if just to one of you for a refinance or such....

It's a taxable distribution at fair market value. 

No Rentals in S corps.