S-Corporation Shareholder Compensation: Reasonable Compensation…..how much is enough?

Some of the benefits of an S Corp are fuzzy, at best.

While most business owners love this practice, the IRS continues to overturn a high percentage of these cases causing the business owners to reclassify the distributions as compensation subject to payroll taxes.

Things to consider; the IRS looks at several factors when evaluating active shareholders compensation:

  • What is the nature of the S-Corporation’s business?
  • What are the active shareholder’s qualifications, responsibilities, time and effort devoted to the business?
  • How does the shareholder’s compensation compare to non-shareholder employees compensation?
  • What do comparable businesses pay for similar services?
  • What is compensation as a percentage of corporate sales and profits?
  • How does compensation compare to distributions taken?

If you are an S-Corporation and are active in the business, Paradigm recommends you consider all of these factors. Have a conversation with your tax advisor to determine what results you may have if the IRS were to audit you.

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