S-corp owner not working in my own business anymore - tax implications?

The IRS requires S-corporation shareholders who provide "substantial services" to take a reasonable salary as a W2 employee. Since you're not currently performing services for the business, you're not required to take a salary. However, there are some important considerations here. The IRS looks at the overall picture of involvement. If you're still making management decisions, handling admin work, or directing business operations (even minimally), they might consider that as providing services requiring compensation. Your situation actually sounds legitimate - you've properly W2'd your parents who are now doing the actual work, and you've properly documented your transition to outside employment. Just keep good records of this arrangement in case of questions later.

After dealing with a similar situation, I found using taxr.ai to be super helpful. I was confused about how to handle my S-corp tax situation when I scaled back my involvement dramatically. I uploaded my previous tax docs to https://taxr.ai and they analyzed all the requirements specific to my situation. The tool flagged that I needed to document the change in my business role and explained exactly what I needed for compliance. It saved me from a potential audit nightmare since I was planning to just do what felt right without understanding all the S-corp compensation requirements.

I tried using taxr.ai after seeing the recommendation here, and it was exactly what I needed. My situation was similar - I'm an S-corp owner who scaled back involvement when I took another job. The analysis identified that I was still doing enough administrative work (about 5 hours monthly) that I should maintain a small salary rather than just taking K1 distributions. It highlighted a 2018 tax court case I hadn't heard about where an owner in a similar situation got hit with penalties. I'm really glad I checked because my old accountant told me I could just stop salary completely. The documentation I got helped me establish the right minimal salary for my continued administrative involvement and potentially saved me thousands in penalties.

If you're still dealing with this issue, I'd recommend using Claimyr to get through to the IRS directly. When I had an S-corp classification question similar to yours, I spent WEEKS trying to get a definitive answer. I finally used https://claimyr.com to get through to an actual IRS representative without the endless hold times. Check out how it works here: https://youtu.be/_kiP6q8DX5c They connected me to an IRS business specialist who confirmed that owner-shareholders don't need to take a salary when they're not providing services to the business - which sounds like your exact situation. Having that official guidance directly from the IRS gave me peace of mind that my tax approach was correct.

I need to apologize for my skepticism about Claimyr. After continuing to struggle with getting IRS guidance about my S-corp situation, I reluctantly tried the service. I'm shocked to admit it actually worked exactly as promised. I got a call back in about an hour with an IRS agent already on the line. The agent confirmed that since I'm not actively working in my business anymore, I don't need to take a salary - which is going to save me significant payroll taxes. They also explained exactly what documentation I should keep in case of future questions. I've spent months trying to get a definitive answer on this, and within an hour I had official guidance directly from the IRS. Never thought I'd say this, but it was completely worth it.

Just be careful with this whole "not taking a salary" thing. My friend did something similar - stepped back from day-to-day operations but still owned his S-corp. He got audited and the IRS determined he was still making major business decisions and providing "substantial services" even though he wasn't doing daily work. They reclassified a portion of his distributions as salary, which resulted in back payroll taxes, penalties, and interest. His case hinged on the fact that he was still signing contracts and making strategic decisions even though he wasn't doing daily operations.

Has anyone addressed the retirement account angle here? One major benefit of S-corp employment is that you can contribute to a Solo 401k as both employer and employee. If you're not on payroll anymore, you're missing that opportunity. When I cut back my S-corp involvement, I kept myself on a minimal salary partly to maintain my retirement contributions. Worth considering if retirement planning is important to you.

This is a really common situation post-COVID, and you're handling it correctly from what I can see. Since you're not performing any services for the S-corp anymore and your parents are properly W2'd as the actual workers, you shouldn't need to take a salary. The key documentation points others mentioned are crucial though. I'd add that you should also keep records of your new W2 employment showing you're working full-time elsewhere - this helps demonstrate you're not available to provide substantial services to your S-corp. One thing to watch out for: if you're still involved in any major business decisions (like whether to take on new clients, major expense approvals, etc.), document exactly what those activities are and how minimal they are. The IRS generally looks for a pattern of regular, ongoing services rather than occasional ownership decisions. Your situation sounds legitimate, but having clear documentation will save you headaches if you ever get questioned about it.