Reasonable salary for S-Corp with low profits?

[BusinessMan]

I'm confused by what a reasonable salary has to be before I can start taking dividends.

Last year my income from my ecommerce sole proprietorship was about $40,000. I'm considering creating a wholly owned S-corp, with the intention of lowering my tax liability by paying myself a lot less than $40k in salary, and taking the rest in dividends. It would have to be a big enough difference to offset the $800 CA annual corporate tax and possibly hiring an accountant for the more complex structure I'm faced with.

The below article seems to suggest that a "reasonable" salary that an employee must take before taking dividends is determined by the IRS looking at several factors, including similar professionals' benchmark salaries, the % of net sales, and how much personal effort the employee puts into the business.

Forbes Welcome (http://www.forbes.com/sites/anthonynitti/2014/02/04/tax-geek-tuesday-reasonable-compensation-in-the-s-corporation-arena)

With my business, many people simply place orders online, so some of it runs with minimal work required daily. I'm engaged in other pursuits, and going forward I expect to work about 20 hours a week in this business. Maybe I should figure I'm paid minimum $20/hr and therefore $21,000/yr is a reasonable salary?

Is there even a tax form that clarifies why I'm taking only $21,000 in salary?

What if my business made only a meager $15,000 one year? Would it be unreasonable to take any dividends at all, given that $15,000 isn't even a very big salary for the work I'm putting in?

[tallen]

One approach would be to keep time sheets to document the actual hours you put into the business, and pay yourself an hourly wage. Throw in a few extra hours to account for the time you spend thinking about business (marketing, administration, answering random phone calls, etc....) while doing something else. If there is a regular pattern, once you have documented the actual hours over some period of time, then you could shift to paying yourself a salary based on the average hours rather than having to keep time sheets. One of my businesses doesn't have a regular pattern, so I still treat myself as an hourly employee.

[Freelancier]

You're confusing "salary" with "full-time work vs. part-time work". You can pay yourself a salary based on it being part-time work as well. With only $40K of income, it's probably not going to save you a lot at this point to be incorporated. Let's say the savings is 15% and you're in a tax bracket above the lowest ones. Let's say you split the money so that half is income, half is dividends. That's $20K you have to pay as payroll (and paying payroll taxes on it each period, so you'll want to get a payroll service to handle the dirty work) and the rest you pay as dividends. The 15% of $20K is $3000. Take out $800 for corporate tax, $100 for corporate renewal, another $500-700 in payroll service fees if you don't want to handle that yourself (and it's a pain), and then money for an accountant to file your returns. I don't see the big win at this point, but I see an increase in hassle. When you get to maybe $80K, you'll want to revisit this, but right now it's not reliable enough or a big enough windfall to spend the time and money to do it.

At this level of income, assuming you have a "real job" that reliably pays your bills, I'd consider putting as much of it away for retirement as possible: Retirement Plans for Self-Employed People (http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People) (the advantage being you get taxed only on what you're keeping, but you are building the nest egg you'll need in the future to survive the 20-30 years after you stop working).