IRS continutes to go after S corporations that pay low salaries to owners

Many owners of S companies take low salaries so the bulk of the profits are passed through to their own returns free of Social Security and Medicare taxes. IRS and the courts balk at this practice. In a recent case, a CPA set up an S company to serve as a partner in an accounting firm. He took a $24,000 salary from the S firm in a year when its share of the partnership’s profits was $203,000. An Appeals Court agreed with the IRS that the pay was unreasonably low, relying on an expert’s testimony that the CPA’s services were worth $91,000. The Court held that $67,000 of the profits are properly reclassified as salary and subject to payroll taxes.