Background
To understand this issue regarding S Corporation payouts as wages, you must first understand the difference between an S corporation and a C corporation. In an S corporation, income passes to the shareholders who then pay taxes on their share of income on their personal tax returns. However, a C corporation pays corporate and personal tax which some people call “double taxation”.
S corporations typically pay little wages, or even none at all, to their employee-shareholders. Because of this, they would not pay many of the payroll taxes usually charged for wages and the IRS tends to challenge the type of compensation paid to officers not run through payroll.
In a current case, a taxpayer was a lawyer in Minnesota who had her law firm operating as an S corporation and was the only shareholder. However, in the years from 2011 through 2013, there was another attorney who worked at the firm and earned a salary. However, the taxpayer did not report wage payments during those years.
The Problem
The problem here comes with the fact that the payments reported by the taxpayer did not match the payments reported by the S corporation, which caused a red flag. While in 2011 the S corporation did report the wages to the other attorney, it did not report the $62,000 of her payments as wages subject to payroll tax. .
In 2012, $73,000 was reported as income payments but not wages by her or the S corporation. In addition, in 2013 $48,000 was claimed as other income by her and the S corporation, although they both did report some wage payments.
Typically for an S corporation firm with a sole shareholder, payments would be considered wages subject to payroll tax calculations. In this case the taxpayer tried to say that the money was not wages but withdrawals from the partnership. She said that she only made the mistake of not paying self-employment taxes, but there was no evidence for the claim.
Bottom Line
At the end of the day it is not believable that a sole shareholder of an S corporation law firm did not provide any legal services throughout the year and receive payments which would be considered wages.
If you are performing services for an S Corporation, be sure to pay yourself a reasonable wage and submit all payroll taxes due. A fair amount is what you would pay someone else in your position to do the work.
Are you needing help deciphering payroll tax laws or assistance with payroll processing? We are here to help! Contact us for a quote and learn all of the services available to you and your small business. We can be reached at 310-534-5577 or [email protected].
Find more information from the source of this article here: https://www.accountingweb.com/tax/business-tax/tax-court-rules-s-corp-payouts-are-wages
