Finance 1 S Corporation Shareholder Employee Compensation

 

S Corporations must pay “reasonable” compensation to each shareholder-employee in return for services that the shareholder-employee provides to the corporation BEFORE non-wage distributions may be made to the shareholder-employee.

 

Thus, distributions and other payments by an S Corporation to a shareholder-employee MUST be treated as taxable wages to the extent the amounts are reasonable compensation for services rendered to the corporation.

 

Shareholder-employees who fail to pay themselves reasonable compensation and take distributions run the risk of having the IRS reclassify the distributions as wages which can result in various IRS penalties.

 

What determines “reasonable” compensation will depend on various factors which are specific to both the business itself and to the industry as a whole.


This  article was written by  Donald M. Scherzi, CPA, CFP, LLC

 

Mike Lupo, SCORE Counselor

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