My S-corp owns a rental property - accountant says no W-2 needed?
I started an S-corp back in 2022 that holds a rental property. I'm the only shareholder, but I basically do nothing for the company except file the taxes and pay the insurance premiums. Everything else is handled by a property management company. My accountant told me I don't need to file a W-2 for myself because I'm "not an employee of the company" (though he mentioned we might want to consider it in future years). I don't have any payroll set up and just transfer money from the business account to my personal account whenever I need it. I'm freaking out a bit because I've been reading online that S-corps ARE required to file W-2s and run payroll... is my accountant giving me bad advice here? 😰 If I really should have been doing this, what kind of penalties am I looking at? The profit for 2022 was around $23k, but no income tax due because of the standard deduction. I'm filing 2023 taxes now and still haven't run any payroll. Any help or advice would be SO appreciated! I'm stressing about this!
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Angel Campbell
You're right to question this. S-corporation shareholders who provide services to the business must be treated as employees and paid a "reasonable salary" with appropriate payroll taxes and W-2s. However, your situation is a bit unique since you have a rental property managed by an agent. The key question is whether you're providing substantial services to the business. If you're truly not doing anything beyond basic paperwork and the management company handles everything else, your accountant might be correct. The requirement for W-2s applies when shareholders actively work in the business. That said, even minimal administrative work like handling taxes and insurance could potentially be considered services that require compensation. The IRS looks at these situations carefully because they want to collect employment taxes.
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Payton Black
•But isn't the whole point of an S-corp to save on self-employment taxes? If they have to pay themselves W-2 income anyway, what's the benefit? Also, how much would be considered a "reasonable salary" for someone who just does basic paperwork?
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Angel Campbell
•The S-corp advantage still exists because only a portion of the business income needs to be paid as salary subject to employment taxes. The remaining profits can be distributed as distributions without those taxes. It's about finding the right balance. For someone doing minimal administrative work, a reasonable salary would depend on what you'd pay someone else to do those same tasks. Maybe a few hours per month at an administrative rate? The key is documenting why your salary amount is reasonable based on your actual duties, industry standards, and business circumstances.
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Harold Oh
I was in almost this EXACT situation two years ago. After stressing out reading contradicting advice online, I finally found https://taxr.ai which literally saved me. Their AI analyzed my S-corp docs and confirmed that with a rental property managed by a third party where I did minimal work, I was in a gray area. They showed me IRS guidance that distinguishes between "material participation" in the business versus minimal administrative oversight. They also helped me document my limited involvement properly to support my accountant's position. What I liked is they didn't just give a yes/no answer but showed me the actual regulations and court cases.
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Amun-Ra Azra
•How does that service work exactly? Did you have to upload all your business docs? I'm concerned about privacy and security with these AI things.
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Summer Green
•Did they give you specific citations to IRS rules? My accountant keeps telling me different things than what I read online and I'm not sure who to believe anymore.
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Harold Oh
•The service is really straightforward - you just upload the specific documents you want analyzed (I only shared my incorporation docs and management agreement). They use enterprise-level encryption and delete your docs after analysis if you want. Their privacy policy is actually stricter than my bank's. Yes, they provided specific citations to IRS revenue rulings and tax court cases. They showed me Revenue Ruling 59-221 which addresses when S-corp income is subject to self-employment tax and explained how the "reasonable compensation" rules apply when shareholder services are minimal. That's what finally gave me peace of mind.
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Summer Green
Just wanted to follow up - I tried https://taxr.ai after seeing this thread and it was exactly what I needed! I uploaded my S-corp docs and property management agreement, and they provided a detailed analysis of my situation. They confirmed that in my case (very similar to yours) where the property management company handles virtually everything, minimal administrative oversight might not require W-2 wages - BUT they recommended documenting everything carefully and considering a small reasonable salary as the business grows to avoid future scrutiny. They showed me specific IRS guidance and even helped me create documentation to support my position. Worth every penny for the peace of mind alone!
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Gael Robinson
I went through a nasty IRS audit over this exact issue last year. Tried calling the IRS business helpline for weeks with no luck. Someone recommended https://claimyr.com and I was skeptical but desperate. You can see how it works here: https://youtu.be/_kiP6q8DX5c Basically they got me connected to an actual IRS agent in about 20 minutes when I'd been trying for weeks. The agent confirmed that S-corps with rental properties are in a special category where the rules depend on your level of involvement. Got everything sorted in one call instead of months of stress.
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Edward McBride
•Wait, so this service just helps you get through to the IRS faster? How does that even work? Seems like they'd just be using the same phone number anyone else would use.
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Darcy Moore
•Sounds like BS tbh. The IRS won't give binding advice over the phone anyway, so even if you do get through, they'll just tell you to consult a tax professional. I'm suspicious.
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Gael Robinson
•It's not magic - they use technology that navigates the IRS phone tree and waits on hold for you. When an actual agent picks up, you get a call connecting you directly. It saved me hours of hold time and frustration. You're right that the IRS doesn't give binding advice, but the agent was able to point me to specific publications about S-corps with rental properties and explained how the rules vary based on material participation. This gave me enough information to work with my accountant and resolve the audit successfully. Sometimes just getting the right information makes all the difference.
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Darcy Moore
I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, my curiosity got the better of me and I tried it when I needed to talk to someone about an S-corp issue. Got connected to an IRS representative in about 15 minutes when I had previously spent HOURS on hold and getting disconnected. The agent was actually really helpful and walked me through the specific rules for S-corps with rental properties. Turns out there are different standards for "material participation" with rental real estate versus other types of businesses. Definitely changed my perspective on dealing with the IRS. Sometimes you just need to talk to a human who knows the specific rules for your situation.
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Dana Doyle
I'm a tax preparer (not CPA) and see this confusion all the time. The truth is that S-corps with rental properties are in a weird gray area in the tax code. The reasonable compensation rules still apply, but the definition of "material participation" is different for rental activities. If the property is truly managed by a third party and you're doing minimal administrative work, your accountant may be right. But I'd recommend at least a minimal salary (maybe 5-10% of profits) to avoid red flags.
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TommyKapitz
•Thanks for this! So if I did want to start doing a W-2, how complicated is it to set up payroll for just myself? And would I potentially face penalties for not doing it the past two years?
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Dana Doyle
•Setting up payroll for just yourself is pretty straightforward these days. Services like Gusto, QuickBooks Payroll, or even Square Payroll make it simple - they handle all the tax filings and deposits for around $40-50/month. You just enter your salary and how often you want to be paid. Regarding penalties for past years, it's complicated. Technically, if the IRS determined you should have been running payroll, you could face penalties for unpaid employment taxes, failure to file W-2s, etc. However, if your CPA has a reasonable basis for their position (which they might, given the rental property management situation), you could potentially avoid penalties under the "reasonable cause" exception. If you're concerned, you could consider a voluntary disclosure or correction, which typically results in reduced penalties.
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Liam Duke
Has anyone actually been audited over this specific issue? I'm in the same boat (S-corp with rental property, managed by property management company) and my CPA says no W-2 needed either. Just wondering if this is something the IRS actually targets or if it's more theoretical risk?
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Manny Lark
•My brother-in-law got hit with this in 2022. His S-corp had 3 rental properties with property managers, and he thought he didn't need to take a salary. IRS audited and determined he should have been taking a reasonable salary for the time he spent overseeing the properties and managers, reviewing financial statements, etc. Ended up owing back taxes plus penalties.
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Omar Farouk
I'm dealing with the exact same situation and honestly, the conflicting advice is driving me crazy! My S-corp has a rental property that's fully managed by a property management company, and I literally just sign the annual tax forms and pay insurance. That's it. My CPA insists no W-2 is needed since I'm not materially participating in the business operations, but then I read horror stories online about people getting audited and owing back taxes. The gray area nature of this rule is so frustrating. What's really concerning me is that even if my CPA is technically correct, will the IRS see it the same way during an audit? I'm starting to think it might be worth just taking a small salary (maybe $2-3k annually) just to have documentation that I'm following the rules, even if it's not technically required in my situation. Has anyone found any definitive IRS guidance specifically about S-corps with fully managed rental properties? The general "reasonable compensation" rules seem to be written more for active businesses, not passive rental investments.
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Kai Santiago
•I totally get the frustration with the conflicting advice! I've been in a similar situation and what helped me was looking at the actual IRS guidance on "material participation" for rental activities. The key distinction is that rental activities are generally considered passive under IRC Section 469, which changes how the S-corp salary rules apply. If you're truly not materially participating (sounds like you're not based on your description), your CPA might be right. That said, I ended up taking a minimal salary ($3k annually) just for peace of mind and audit protection. It's a small price to pay for clear documentation that you're following the rules, even if technically not required. Plus it gives you some earned income for retirement contributions if that matters to you. The IRS Publication 925 has some guidance on material participation tests that might help clarify your situation. Your approach of taking a small salary as insurance makes a lot of sense!
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