Denver design agency, $24K salary on $480K revenue creating IRS audit risk. Restructured to $84K. Saved $28,400 net. Audit risk eliminated.
01The Situation
This Denver S-Corp owner was paying himself $24K in W-2 salary on $480K revenue, a known IRS audit trigger. His prior preparer had never challenged this. He came to us after a colleague who had survived an IRS examination told him his salary would never hold up.
02What We Did
We benchmarked reasonable compensation using BLS data, industry surveys, and comparable job postings. Defensible range: $78K to $92K. Set at $84K, fully documented. The SE tax savings on distributions of $30.1K outweigh additional payroll tax on the higher salary of $4.6K by $28,400 net annually.
Breakdown
| Component | Before | After | Tax Impact | Notes | Status |
|---|---|---|---|---|---|
| W-2 Salary | $24,000 | $84,000 | SE tax on extra $60K | Defensible comp | |
| S-Corp Distribution | $213,174 | $213,174 | No SE tax maintained | Core benefit preserved | |
| Employer Payroll Taxes | $1,836 | $6,426 | +$4,590 | Required on W-2 | |
| SE Tax Avoided | $30,117 | $30,117 | Key S-Corp saving | Fully maintained | |
| IRS Audit Risk | HIGH | ELIMINATED | Compliance benefit | $24K was a known trigger | |
| NET SAVING | not applicable | $28,400 per year | Per year going forward | All adjustments included |
"I have been running a $480K business and paying myself a $24K salary for three years, and nobody ever told me this was a problem." The S-Corp structure is valuable only when set up correctly.
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