S-Corporation Salary Requirements

As you may or may not be aware, an Officer of an S Corporation is specifically included within the definition of an employee for payroll taxes ( FICA - Federal Insurance Contributions Act, FUTA - Federal Unemployment Tax Act, and Federal Income tax withholding under the Internal Revenue Code. As a corporate officer performs services for the company, and receives or is entitled to receive payments, his or her compensation is presumed to be wages by the IRS.S corporations should treat payments for services to officers as wages and not as distributions or loans to shareholders. This is common mistake, and results in an underpayment of payroll taxes by the corporation. The IRS will also insist that the corporation pay a reasonable salary. So what is a reasonable salary you might ask?

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various tax courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. The courts considered factors such as, training and experience, Duties and responsibilities, Time and effort devoted to the business (This would be a big component for all you single officer S-Corporations out there), Dividend history, Payments to non-shareholder employees, Timing and manner of paying bonuses to key people, What comparable businesses pay for similar services (Industry comparison form your Census forms), & Compensation agreements.

When in doubt, consider it salary up to the amount you received as distributions. This may sound as a very conservative approach, but the IRS has been investigating companies who are under reporting wages, look at your corporate return, there is a line for officer salaries. It isnt much of a stretch to figure out if you took an appropriate wage last year.