Q  What are the best ways for a principal to take money out of an "S" corporation with minimal tax consequences?

A   If you are the only stockholder in the corporation, this means that you are an employee of the corporation and receive a salary.  You are also a stockholder and can receive distribution on company profits.  The distributions you receive are not subject to the 15.3 percent in taxes.

As a general rule, you can take two thirds of the profits as a salary (subject to social security taxes) and one-third of the profits as a distribution )not subject to Social Security taxes) but taxable for income taxes).  If your company sees a profit of $60,000 before paying you any money, you would cut your tax bill by $3,060 ($20,000 multiplied by 15.3 percent).

You might think it to be more profitable to take a small salary and a large distribution.  In this case maybe taking $12,000 as salary and $48,000 as distribution.  Not true.  The IRS doesn't consider that kind of split "reasonable."  Although there are no hard and fast rules in the IRS code, don't get greedy.

Perks are another way to reap corporate rewards.  For example, combine your vacation with the

annual corporate meeting and take the expenses as a business deduction.  It is important that the trip is primarily business, including a few meetings, but you can also take some personal time during a business trip.  Familiarize yourself with the IRS travel-deduction rules.  If you plan anything extravagant, consult with your tax advisor.  There are legitimitate ways to convert personal expenses to business expenses.  But, you have to be aware of the rules.  Check out the tax regulations at               www.irs.gov where you can access all the IRS publications. 

Q I use independent contractors in my business, but I have heard that the IRS can reclassify contractors as employees.  How can I protect myself?

A The independent contractor question is an ongoing "gray" issue with the IRS.  Two IRS publications (numbers 15 and 15-A) give basics about how to define an employee and the questions used in making a determination.  You can request these publications by calling 1-800-829-3676 or download them from the IRS Web site, www.irs.gov.

A key issue separating an employee from an independent contractor deals with the control you

Next Page