S Corporation Officers & Payroll
In this article
- IRS Guidelines for S Corporations
- Corporate Officers of S Corporations are Employees
- Wages Before Distributions
- Reasonable Compensation
- Medical Insurance Premiums as Wages
IRS Guidelines for S Corporations
IRS FS-2008-25, "When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Sub-chapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders."
IRS FS-2008-25, "S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages."
IRS, "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly."
IRS Form 1120S, "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
Corporate Officers of S Corporations are Employees
Payments to shareholder-employees for their services are subject to all employment taxes including Federal withholding, Social Security, Medicare, Colorado withholding, & Colorado unemployment.
Wages Before Distributions
The corporation should first pay the officer(s) wages as employees for their services prior to paying any distributions to the shareholder(s).
We at ASAP Accounting & Payroll advise all officers to speak with their CPA's throughout the year to develop proper tax planning and to help establish a reasonable compensation for the officers as employees prior to issuing any distributions to the officers as shareholders. If you need a CPA, please let us know. To be clear, ASAP is not your CPA. Instead, ASAP is your day-to-day accounting pro. We prefer to work closely with your CPA to help translate and implement the tax plan they have created for you.
IRS indicates that some factors considered by the courts in determining reasonable compensation:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
Medical Insurance Premiums As Wages
The cost of any health and accident premiums paid on behalf of a shareholder are deductible, so as long as the company has fulfilled the requirement to report amounts on the officer's W2. The amount is subject to Federal & Colorado income taxes, but exempt from FICA, and FUTA. Therefore it is included in box 1 wages, but not in box 3 or 5. While not required, we typically will include the amount as a memo in box 14 other on the W2 as a courtesy to your preparer. Your account manager may start requesting this from you in early December as "2% shareholder health premiums" as the rule applies to the health & accident premiums shareholder that own 2% more of the stock of a sub-chapter S corporation. If ASAP is not providing you additional accounting services, please compile an accurate sum of all premiums paid for or reimbursed by the corporation on the behalf of the officers and their dependents.
S Corporation Tax Resources
Information on this page was compiled from these sources:
- IRS.gov: S Corporations
- IRS.gov: S Corporation Employees, Shareholders, and Corporate Officers
- IRS.gov: S Corporation Compensation and Medical Insurance Issues
- Colorado.gov: Employer Services FAQ, Premiums (Question 6)
- NOLO.com: Legal encyclopedia article regarding S corporation salaries