Don’t “wage” war with the IRS – Review S corporation compensation to help ensure it will pass muster

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Abstract: The payment of reasonable compensation to S corporation shareholders is high on the IRS’s list of audit concerns. That’s because S corporations that make distributions of profits in lieu of salaries to employee shareholders enjoy significant savings on employment taxes. In recent years, auditors have been scrutinizing S corporation salaries and recharacterizing distributions of profits as wages when they feel that shareholder compensation is unreasonably low. The result: Affected businesses receive an unpleasant surprise in the form of a bill for unpaid employment taxes, plus penalties and interest. This article offers advice on how to determine reasonable compensation.