S Corp Reasonable Salary

Wages vs. Distribution

The IRS requires that Distributions to corporate offices must be treated as wages to the extent they are reasonable compensation for services.  Significance payroll taxes

 

Watson Case…IRS can reclassify paid 24,000  IRS determined the FMV.

No longer 50 50 Rule.  IRS S Corp audits are increasing.  Tax Gap. S corp audits up 33%

Factors

Replacement cost…FMV of services and cost to replace. Based on a number of factors and far from an exact science.  Full-time is 2080 hours per year, even if you work 60 hours a week.  Beurue of Labor Statistics

When you form an S Corp, IRS will give you notice…Revenue Ruling 74-44  RC never bigger than distributions.  Don;t have to take a distribution at all.  IRS just has power to reclassify.

Training and Experience

Duties and Resonsibilities

Time and Effort Devoted

What comparable business pay for Similar Services

Use of Formula Methodology to Determine Compensation (documentation)

Relation to Payments of non-shareholder employees

Written Compensation Agreements

Timing and Manor of Paying Bonuses

Dividend History

 

RC REports.

 

 

 

 

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