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IRS scrutinizes S corp compensation

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in Small Business Tax

Q. I’m an S corporation owner with compensation based on ownership percentage. Could I run into problems with the IRS? L.C., Savannah, Ga.

A. Yes. S corp owners may try to reduce employment tax liability by keeping salary on the low side. Thus, the IRS often considers contingent compensation arrangements and compensation proportionate to stock ownership to be suspect. Although each case is decided on its own merits, the courts in some jurisdictions have determined compensation amounts to be “unreasonable” in these situations.

Tip: A better approach is to have compensation based on services actually performed.

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