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