Reasonable-compensation standard creates tax risk for S corporation owners

05/5/2012 | Journal of Accountancy

Individuals who receive pass-through income from an S corporation are generally not subject to self-employment taxes. However, S corporation owners who provide a service to the company must receive reasonable compensation that is taxable. Such individuals should be careful to document the analysis behind compensation decisions to avoid penalties, which can include a reclassification of dividends by the Internal Revenue Service.

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