Mastering the Rules of S Corporation Shareholder-Employee Compensation

Description

Perhaps the most significant advantage of the S corporation is the ability of shareholders to pass through some of the corporation's net income to its shareholders without incurring two levels of income tax or employment tax on the amounts.

However, the IRC requires S corporations to pay "reasonable compensation" amounts to shareholders who provide services to the business. The Code does not set a bright-line rule but instead uses a facts-and-circumstances test to determine how much is reasonable compensation.

The IRS is aggressively pursuing S corp shareholder-employee compensation arrangements in circumstances where the Service deems the shareholders to be avoiding employment tax through unreasonably low compensation.

The Service's track record in tax court has been, by and large, successful. Generally, when the IRS has challenged compensation schemes, distribution payments have been reclassified as salary, resulting in the S corps and the shareholder-employees paying additional employment taxes plus interest and penalties.

Listen as our experienced panel provides guidance on how to document an S corporation shareholder-employee compensation plan, how to remedy plans that could be subject to examination, and how to defend against IRS challenges.