Is your closely held corporation paying reasonable compensation to its shareholder-employees?

One of the many items on our watch list for this coming income tax season is reasonable compensation for our corporate clients (in particular, we are watching for unreasonably low compensation paid to S Corporation shareholder-employees).

The general rule of thumb that should be applied is: "How much would the corporation pay someone else to do the work currently being done by a shareholder-employee?"

If the corporation pays a shareholder-employee $5,000 and the shareholder-employee provides significant services to the corporation, the IRS may reclassify a portion of nondividend distributions as disguised compensation. This is particularly of concern for those S Corporations that pay minimal salaries (for example, $0 to $20,000 of salaries) and significant nondividend distributions (for example, $50,000 and up).

If you think this may describe your S Corporation, please contact us so that we can help you evaluate your individual situation.

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Last modified: January 06, 2005

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