Legal Question in Business Law in California

The owner of an S-Corp has elected to be taxed as a sole proprietor. Therefore there is no distinction between salary and taking profits from the company. All profit in a given year is taxed as income to the owner, regardless of whether it remains in the company or is transferred to the owner's personal account. If there is more than one owner, there still is no such thing as "salary" for an S-Corp owner, but the company must be sure to reflect the respective transfers on the Schedule K's that will be prepared, so that each owner gets appropriately taxed for their share of the profits.

The self-employment tax is 15.3 percent. In an S-Corp there is a taxable difference between paying a salary and making a distribution (profits) to shareholders. Only the salary is subject to employment taxes and withholding, so to the extent profits come out in distributions, rather than salary, there is no employment and/or self-employment taxes and withholding. Of course, the salary amount has to be commensurate with industry standards or invites an IRS audit, and the S-Corp needs to maintain a payroll system and make ongoing tax payments. This could be a bit problematical with "as needed" electronic payments.

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