What's considered a "reasonable salary" though? I've heard everything from 30% to 60% of profits should be salary. Is there an actual rule or is it just whatever you can justify?

There's no fixed percentage that's automatically considered "reasonable" - it depends on your industry, location, duties, and what comparable positions would earn. I've found that industry salary surveys are helpful for documenting your decision. For my construction management business, I settled on about 40% of profits as salary after researching what project managers in my area typically earn. The key is having documentation to support whatever number you choose. The IRS is mainly concerned with people taking a tiny salary and huge distributions to avoid payroll taxes. As long as you can justify your salary with market research, you're generally in good shape.

Oh crap I didn't even think about that. What state are you in? I'm in California and now I'm wondering if I need to do something separate for state taxes.

That works until the IRS comes asking why you're receiving money from your partners that isn't being reported as income. Cash transfers between individuals over a certain amount get flagged. Plus OP mentioned this could grow to $200k territory - definitely not something you want to handle informally at that point.

Good point about the potential growth. I was just thinking about the current amount. You're right that once you start moving larger sums of money between individuals, the IRS starts to take notice. I still think for the current small amount, informal handling might be fine, but you're absolutely right that they should establish proper structures now if they're anticipating growth to $200K. Setting things up correctly from the beginning is much easier than trying to correct issues later, especially with the IRS involved.

I was thinking the same thing. "Too many W-9s" isn't a real issue. You don't "use up" W-9s. Something doesn't add up with their reasoning.

That's a really good point I hadn't considered. Did you have to get a new EIN and everything? And did your clients issue two separate 1099s for the year - one to you personally and one to your S-corp?

Yes, you'll definitely need a new EIN for your corporation - that's actually a prerequisite for filing Form 2553. And most clients will issue two separate 1099s - one to your SSN for work performed before the entity change, and one to your corporation's EIN for work performed after. Make sure to communicate the change clearly to your clients with the effective date, new EIN, and any new payment instructions. Some might need a new W-9 and updated contracts. I actually created a simple one-page document explaining the change that I sent to all my clients, which helped smooth the transition.

I had one rejected last year, but it was because I made a stupid mistake on the form. I checked the wrong tax year on Form 2553 and didn't notice. Resubmitted with the correct year marked and a better explanation letter, and it was approved the second time. Just double-check everything before submitting!

Are there specific employee count limitations for QSEHRAs? I have a client with around 15 employees who's been asking about alternatives to their expensive group plan.

QSEHRAs are limited to employers with fewer than 50 full-time equivalent employees and who don't offer a group health plan. Your client with 15 employees would qualify as long as they don't currently have a group health plan in place. For clients transitioning away from group plans, there's a special timing consideration - they need to terminate their group plan before implementing the QSEHRA. There's no "both/and" option here. Also, make sure your client understands they must offer the QSEHRA on the same terms to all full-time employees (though benefit amounts can vary based on family size and age).

For small business owners with student loans, I recommend looking into income-driven repayment plans if they have federal loans. The business structure can significantly impact their adjusted gross income, which then affects their required payments. S-Corps can be particularly helpful here since some income can be taken as distributions rather than salary, potentially lowering AGI for student loan payment calculations.

Thanks, that's helpful! I do have most of my clients with student debt set up as S-Corps already, but I hadn't specifically considered the loan payment angle when determining salary vs distribution ratios. I've been more focused on the SE tax savings. Do you know if the IRS and Department of Education communicate about "reasonable compensation" standards? I'd hate to optimize for student loan payments only to create an audit risk.

Would filing Form 8919 cause problems for future tax returns if the SS-8 determination takes a long time? I've heard those can take 6+ months to process. Also, since we have literally zero documentation (no emails, texts, or anything in writing about employment), would this approach even work?

Filing Form 8919 won't directly cause problems for future returns, but if the SS-8 determination eventually comes back not in your favor, you might need to file an amended return and pay the additional self-employment tax plus potential interest. It's a bit of a gamble. With zero documentation, your case for employee classification is definitely weaker. The SS-8 form asks about specific factors like who controlled the work schedule, provided tools/equipment, determined how the work was done, etc. If the answers to these questions indicate contractor status, or if you can't provide any supporting evidence, the determination might not go your way. For only $2,100, the Schedule C route might be simpler unless you have strong verbal evidence of employee status.

This is absolutely true! I was misclassified last year and after adding up all my legitimate expenses (mileage, portion of phone bill, home office, supplies), I actually ended up with less tax liability than if I'd been properly classified as an employee. Just make sure you have documentation for everything in case of an audit.