Discussion:S corporation wages
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> S corporation wages
Discussion Forum Index --> Tax Questions --> S corporation wages
| 6 July 2009 | |
| Here's a link I just received via the IRS e-News for Tax Professionals: "Get new and updated information on forms, publications and resource materials about S Corporations"
http://www.irs.gov/businesses/small/article/0,,id=203100,00.html Our favorite subject (after LLC/SE taxes)! | |
| July 7, 2009 | |
| I hope this will finally convince those of you that think there is some absolute requirement to pay employees a reasonable wage. What's required is to treat as a wage anything that is; if nothing is paid, openly or in disguise, nothing has to be treated that way. They manage to say that 3 different times in the first 4 sentences on this issue. | |
| July 7, 2009 | |
| Haven't read it yet, BUT if they are not in line with case law... | |
| 7 July 2009 | |
| But if nothing is paid, and you are paying taxes on the income earned by the S Corp,not out of the S Corp but out of your own pocket, what's the point in having the S Corp in the first place? When something is paid out of the S Corp, then a "reasonable salary" "must" be paid before any other distributions, correct? So what is the point of having an S Corp if you never receive anything from it so as not to have to pay employment taxes? Am I missing something? From what I see, you must pay shareholder employees a reasonable wage first before any other type of distribution. Is that correct? | |
| 7 July 2009 | |
| Bryce, your understanding is the same as mine (and LH's).
S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly. Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation. No distributions, no salary required. Period. I have NEVER seen or heard of a case where salary was imputed in excess of actual distributions. That's why I was so surprised, in the other thread, when it appeared that a Revenue Agent was proposing to impute salary in a loss year when the stockholder had taken no distributions. If that's true, the RA is just wrong. (See Discussion:1120S corp reasonable salary-audit issues.) | |
Southparkcpa (talk|edits) said: | 7 July 2009 |
| While the reading above IRS piece makes total common sense AND has been my understanding for over 20 years, my thought is that the quote "The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly" is to protect a corporation that is in a year where paying down debt AND/OR reinvesting in the business were selected over distributions. This business model cannot go one for more more than a few years as cash will run out and tax liability to s/h's will force distributions eventually. It still makes NO attempt to determine what a "reasonable" salary is but does set a maximum. | |
| July 7, 2009 | |
| You don't have to reinvest in the business. You can invest in anything. Maybe the owner-employee needs cash, but maybe he has another job, or he can live on his wife's income, or on savings. If he needs cash, maybe he can sell some of his shares, or borrow against his shares, or accumulate income between years to get as much as possible over the social security cap (if the law doesn't change...), and even maybe have a fighting chance of arguing that the "reasonable compensation" should only be for the current year's services.
It doesn't make too much sense to go way out of your way to save employment tax, especially if it's just at the Medicare rates, but there is room to do quite a bit if you want to. | |
Harry Boscoe (talk|edits) said: | 7 July 2009 |
| I'm accustomed to more precise writing from the IRS. This "article" [and what authority does this thing have, anyway?] is so casually written that - at the level we deal with issues - it just doesn't hold together well. I think somebody was assigned to write a piece to get the Service's position on *reclassifying* existing payments to shareholder-employees as wages (and treating health insurance premiums as wages for certain shareholders) out to the taxpayer/preparer world but then nobody as nit-picking as I am really scoured the thing to see that it was technically tight and well-written, too.
Examples abound. Especially if you're looking for them with a magnifying glass and a really bright light. Let's try the very first sentence. It refers to compensation for employees and shareholders. Well, shareholders-as-shareholders aren't entitled to compensation; shareholders get distributions, they don't get compensation. And how about the second sentence: "S corporations may run into a variety of issues." I can see myself driving the video cartoon-like S corporation down the freeway, smacking into issues, and knocking them off the road...! When the Service writes "The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly" aren't they really saying that the amount of payments to or for a working shareholder is an upper limit on what an auditor can reclassify to wages? Sloppy writing, where I come from. As far as the compensation to shareholder-employees issue, this "article" isn't much more than a roadmap for the government auditor who's been instructed to reclassify *something* to FICA-taxable wages. I am an experienced professional tax person [don't ask], and I know - I am responsible to know - all this stuff already. I have been working with it for *decades*. But wait! There's more! [RIP Billy Mays - a pitchman's pitchman.] Later the "article" says that the medical insurance premiums paid for >2% shareholders are wages to be reported on the shareholders' W-2. That's not what Notice 2008-1 says... And in the very next breath the "article" says that such health insurance premiums aren't FICA or FUTA wages. That's not what Notice 2008-1 says... Sure, the technically savvy among us know that the "real" analysis is much more complicated and that it may often arrive at the same result, but that only reinforces the fact that this writing has been dummied down, maybe on purpose, maybe not. I don't do "dummied down" very well, do I? Who's really being helped by this article? The IRS auditors who're trying to get up to speed (aren't they always) on these two issues. I know all this stuff already. Hiss!! Meow!! [added after: Sorry, LH, I shoulda pointed out your excellent observation in post #2, above, but my adrenaline was surging and I haven't taken my meds yet this morning, obviously.] | |
| 7 July 2009 | |
| Harry Boscoe - please don't rush to take your meds. Your comments are quite interesting without them. | |
| July 7, 2009 | |
| *shocked* I find that to be a rather succinct article. Perhaps too much so...but nothing new there. Perhaps a warning that they really really mean it this time and will get busier checking on it. I think KatieJ has done some of the best work on this topic, as expected! In the shower this a.m. it occurred to me that you could almost flowchart the thing.
There are three issues: services, profit, money. Are there employment-type services provided? Has there been a profit? Is money paid over other than for existing loan repayments, rent, or reimbursements? All three must be yes in order to then force a reasonable salary. Any no to those three means that there is no salary required. Yet. | |
| 7 July 2009 | |
| Great analyses, everyone.
What's also invaluable is when everyone shares their actual experiences at IRS audits, which I hope we all will continue to do. | |
| 7 July 2009 | |
| JR, I'm not absolutely sure about your second necessary condition. I don't think I've ever seen such a case, but it does seem to me that a salary could be forced in a loss year if the stockholder/employee had taken a distribution in that year -- up to the amount of the distribution.
A propos of Harry's comments: the most questionable statement, to me, is "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation." I hope that doesn't mean they will start recharacterizing loan repayments, expense reimbursements, rent, etc. as salary. | |
| July 7, 2009 | |
| True, from a prior year profit. Perhaps I'll modify #2 to say "Has there been a profit?" meaning other years as well. I know it's oversimplified, but it probably covers 95% of the situations. | |
| 7 July 2009 | |
| This has been very educational and informative for me. So, is it conceivable that a shareholder employee could receive annual loans in the amount of needed annual living expenses , the S Corp earns profit, then that profit is used to repay the loan each year, without being paid a salary? Would corporation bylaws allow such a manuever? Isn't this, in fact, a distribution to the shareholder employee disguised as a loan and would the IRS allow it? | |
| July 7, 2009 | |
| Yeah, that's not what we're describing. What we're describing is a situation where the S/H has actually loaned money to the corp, or profit distributions from prior years not taken and then booked as loans if you're like me and do that for multi-s/h corps. In THAT case, they could repay the open loans, since it's not a profit distribution.
In your example, they ARE taking a profit distribution in order to repay the loan advances, in which case, it cries out for salary. | |
Michaelstar (talk|edits) said: | 7 July 2009 |
| Bryce - yes, what you are suggesting or maybe just questioning - is certainly one of the definitions for "salary". One of the things one wants to do when looking at this subject (as well as most others) is to step back and ask "if it sounds to good to be true - it probably is not".
Don't let any of your clients try to lead you down that path or it will just later cause all kinds of headaches. If there are distributions being made to a corporate owner from Corporate profits who performed services - you have yourself salary issues to be concerned with. If not treated as such, it is just easy pickings when later audited. | |
