USA S Corp Distributions v. Wages subject to Employment Taxes

[Frederick]

I have a 3-member S Corp where each owner is an equal shareholder, but only one of us actively works as an employee in the business. S Corps distributions must equal percentage ownership, so each of us must take 33.33% of the profits. However, the IRS requires S Corp owners who also work as employees to take at least 60% of their compensation as wages subject to payroll taxes. The one who works doesn't make enough to satisfy this ratio once distributions are made.

So my question is, can the employee-owner take his 33.33% distribution like normal and then pay payroll taxes on a portion of it? Or must he be paid first before distributions are made, thus lowering the total profit left from which to make distributions? The first option is best for us, but I don't know if that's permissible.

Thank you!
Frederick

 

[Marshall]

Ithe IRS requires S Corp owners who also work as employees to take at least 60% of their compensation as wages subject to payroll taxes

Where did you get that information?

An S corp owner must take "reasonable" compensation. After he is paid his reasonable compensation, the profit must be divided strictly on the basis of stock ownership. You cannot reduce the amount of S corp income allocated to the employee/owner or distributions of dividends to him to take into consideration his compensation earned.

If you do, you will end up violating the "one class of stock" rule.