What is the reasonable salary for an S-Corporation Officer? A frequently asked question from many including my clients!
The answer however is not simple. The taxpayer prefers “All Distribution” vs. “W2 wages”, so they can avoid paying FICA Tax which is 15.3% (Employee and Employer Portion). The IRS requires “Reasonable Compensation” for S- Corporation Officers.
The term “Reasonable Compensation” is too vague and subjective. In addition, there are no specific guidelines for “reasonable compensation” in the Tax Code or Regulations.
Officer’s salary of $36,000 could be “Reasonable” for certain S-Corporation but not for others, so, the question is how to determine so called “reasonable compensation”? Is there a magic number? The answer is NO.
The solution is that each and every situation could be different & the “reasonable compensation” has to be determined by analyzing several factors. Below are some of the factors courts have considered while determining “Reasonable Compensation”
A simple and pragmatic approach to this issue is that S-Corporation Officers must have a W2, so the line 7 of the 1120S Form (Compensation of officers) does not have a “Zero” which sticks out like a sore thumb. In addition, the closer the W2 wages are to the FICA limit (for 2021 it is $141,900) the safer you are.
By Sal Ghulamali, CPA
He could be contacted at sg@taxcpa1.com
Visit our website: TAXCPA1.COM
This article is for the purpose of providing general information only. It does not provide tax/legal advice for any particular person, entity or situation. Each situation is different and you should consult a CPA/Attorney with complete and pertinent details.
Established in 2001 as a boutique firm in Pembroke Pines, we specialize in Tax Preparation for small-to-medium size businesses, Managing Books, Consulting on Accounting Technology, Implementing Accounting Software, and we also provide Part-Time Controller Services.