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.
Posts Tagged ‘CPA’
IRS continutes to go after S corporations that pay low salaries to owners
Thursday, July 19th, 2012The IRS continues to feast on S firms that pay very low salaries to owners
Thursday, May 31st, 2012
In many cases, S firm owners take low salaries so they can receive the bulk of the corporation’s profits as dividends, which are not subject to payroll taxes. IRS and the courts balk at this practice. In a recent case, the CPA took a $24,000 salary in a year when this share of the S firm’s profits was around $200,000. A district court agreed with the IRS that his pay was unreasonably low and ruled that the dividends are properly reclassified as salary and are hit with payroll taxes.