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S corp liable for paying low salary to sole shareholder

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in Small Business Tax Deduction Strategies

In a fight over whether payments from an S corporation to its sole shareholder are non-FICA-taxable dividends or FICA-taxable salary, the IRS has the final word. A federal trial court has ruled that the IRS had authority to recharacterize non-FICA-taxable dividends distributions from an S corp to its sole shareholder as FICA-taxable wages. (David Watson, P.C. v. United States, No. 4:08-cv-442, D.C. S.Iowa, 2010)

It’s lonely at the top

A tax accountant was the sole employee, shareholder, director and officer of an S corp. At corporate meetings, which the accountant conducted with himself, the S corp agreed to pay him an annual salary of $24,000; all other payments would be taken as dividends distributions. This decision was properly documented in the corporate minutes.

The breakdown: In 2002, he received $24,000 in salary and $203,651 in dividends. In 2003, he received $24,000 in salary and $175,470 in dividends. An IRS expert d...(register to read more)

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