It seems that lately the IRS has been challenging owners of S corporations stating that their compensation is too low and reclassifying distributions (which are not subject to Social Security and Medicare tax) to wages. At a 15.3% rate this can get expensive. The key is to show that your wage is reasonable.
Here are the 5 factors that the courts look at:
1. The employee's role in the company
2. External comparison with other companies
3. Character and condition of the company
4. Potential conflicts of interest (The hypothetical independent investor)
5. Consistency in the compensation
Here are the 5 factors that the courts look at:
1. The employee's role in the company
2. External comparison with other companies
3. Character and condition of the company
4. Potential conflicts of interest (The hypothetical independent investor)
