Get answers to your tax and financial questions! At Morrissey Financial our tax experts have years of consulting and tax planning experience. We can support you in all aspects of business management, from the everyday to the complex.

Lack of reasonable S Corporation salaries can be costly to your financial health

Although S Corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tactic. The IRS may assess S corporations for unpaid payroll taxes, penalties and interest owners' salaries that are unreasonably low. S Corporation owners often take modest salaries as a tax-saving strategy. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. The tax savings may be even greater now that the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) has gone into effect. (S corporation dividends paid to shareholder-employees generally won’t be subject to the new 3.8% Medicare tax on net investment income.) To avoid an unexpected tax bill, S Corporations should establish and document reasonable salaries for each position. Please contact us if you have questions about the right mix of salary vs. distributions for your S Corporation’s shareholder-employees.

Early withdrawals from a retirement plan can be costly

If you’re in need of cash, early retirement plan withdrawals generally should be a last resort. With a few exceptions, distributions before age 59½ are subject to a 10% penalty on top of any income tax that ordinarily would be due on a withdrawal. Withdrawing from a SIMPLE IRA can be especially costly if you have been a participant less that 2 years. There is an additional 25% penalty for withdrawals within 24 months of establishing the account. If you have a Roth account, you can withdraw up to your contribution amount free of tax and penalty. But you’ll lose out on potential tax-free growth. Alternatively, if your employer-sponsored plan, such as a 401(k), allows it, you can take a plan loan. You’ll have to pay it back with interest and make regular principal payments, but you won’t be subject to current taxes or penalties unless you do not make the required repayments. Please contact us if you have questions about potential taxes and penalties on early retirement plan withdrawals. We also can help you determine if there are better options available for meeting your cash needs.