S Corporation Shareholder-Employee Compensation: The Reasonable Compensation Standards

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, February 2, 2022

Recorded event now available

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Course Materials

This course will provide tax advisers and other professionals with a comprehensive examination of the rules governing compensation of S corporation officers and shareholders, focusing on determining, documenting, and supporting reasonable compensation to avoid or withstand IRS scrutiny.

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" 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, remedy plans that could be subject to examination, and defend against IRS challenges.

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Outline

  1. Advantage of distribution vs. wages
  2. Reasonable compensation in the courts
  3. IRS guidelines and criteria
  4. Profitability of an S corp vs. distribution of an S corp
  5. How to: approaches for determining reasonable compensation
  6. Build Back Better and NIIT

Benefits

The panel will review these and other vital issues:

  • What types of businesses and compensation arrangements are most likely to attract IRS challenge?
  • Standards for structuring and defending reasonable compensation plans
  • Identify options for determining fair compensation
  • Assess the consequences of an IRS recharacterization of distributions

Faculty

Hamann, Paul
Paul S. Hamann
President
RCReports

Mr. Hamann is an expert on determining reasonable compensation for closely-held business owners. He has educated more...  |  Read More

Watson, Jason
Jason Watson, CPA
Founding Partner
WCG

Mr. Watson advises small business owners in creating a map for the future. His focus is on S corporations,...  |  Read More

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