S Corporation Shareholder-Employee Compensation: Reasonable Compensation Standards

Perhaps the most significant advantage of the S corporation is the ability of shareholders to pass through some of the corporation's net income to its shareholders without incurring two levels of income tax or employment tax on the amounts.

However, the IRC requires S corporations to pay "reasonable compensation" to shareholders who provide services to the business. The Code does not set a bright-line rule but instead uses a facts-and-circumstances test to determine how much is reasonable compensation.

The IRS is aggressively pursuing S corp shareholder-employee compensation arrangements in circumstances where the Service deems the shareholders to be avoiding employment tax through unreasonably low compensation.

The Service's track record in tax court has been, by and large, successful. Generally, when the IRS has challenged compensation schemes, distribution payments have been reclassified as salary, resulting in the S corps and the shareholder-employees paying additional employment taxes plus interest and penalties.

Listen as our experienced panel provides guidance on how to document an S corporation shareholder-employee compensation plan, remedy plans that could be subject to examination, and defend against IRS challenges.

1. Reasonable Compensation Theory
2. IRS Data and Guidelines Including Tax Court Cases
3. Outside Factors Affecting Compensation (401k, QBID, Spouse, SSA Benefits)
4. RCReports: Approaches for Determining Reasonable Compensation

The panel will review these and other vital issues:

• What types of businesses and compensation arrangements are most likely to attract IRS challenges?
• Standards for structuring and defending reasonable compensation plans
• Identify options for determining fair compensation
• Assess the consequences of an IRS recharacterization of distributions

Learning Objectives

After completing this course, you will be able to:

• Identify the types of compensation arrangements that are most likely to attract IRS challenges
• Discern reasonable standards for structuring and defending S corp compensation amounts
• Recognize appropriate ways to use comparability data in setting shareholder-employee compensation
• Understand changes proposed to the tax treatment of S corporation shareholder compensation in the tax overhaul legislation

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules for S Corporations; supervisory authority over other preparers/accountants. Specific knowledge and understanding of IRC standards on "reasonable compensation for actively participating shareholders; familiarity with the Affordable Care Act provisions regarding reporting of health insurance payments on behalf of shareholder-employees.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).