S corporation focus – IRS scrutiny of unreasonable salaries likely to continue

Description

Abstract: Many S corporations seek to manage their payroll tax liability by minimizing shareholder-employee salaries and compensating them mostly via dividend distributions. But the IRS views unreasonably minimized salaries as an improper means of avoiding payroll taxes. This could lead to the employer and/or employee receiving a bill for unpaid taxes, interest and possibly even penalties. This article explores what “reasonable” compensation is, while a sidebar discusses the new Medicare tax vis-à-vis S corporation distributions. Watson v. U.S., No. 11-1589, Feb. 21, 2012 (8th Cir.)