The IRS has issued a fact sheet as a reminder for taxpayers concerning the compensation of S corporation officers. S corporations must remember compensation to its officers must be reasonable. The fact sheet also highlighted the fact that simply because an officer is also a shareholder does not mean that compensation to the officer is not required to be treated as wages for federal employment tax purposes. Officers who provide more than minor services and are entitled to receive payment for such services are considered employees. However, this is not true for officers that provide little or no services.
Neither IRS regulations nor federal statutes provide guidance on when compensation is considered reasonable. However, numerous courts have provided some guidance. Factors used by courts to determine whether compensation is reasonable include: training and experience, duties and responsibilities, time and effort devoted to the business and comparable businesses for similar services. Readers are put on notice that if they perform services for their S corporations, they must have a “reasonable” salary and not keep their salary low and avoid paying payroll taxes.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors