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Q.Must S-Corporations really pay salaries to its owners?
A.Yes, if the owners are providing services to the corporation. The IRS requires all corporations (both S-corporations and C-corporations) to pay a reasonable salary to any shareholder (owner) who provides services to the corporation. The remaining profits after the payment of a reasonable salary, if any, can be taken as distributions to avoid self employment taxes.
A reasonable salary is based on the amount an unrelated person would be paid in wages for the same work at a different company. Salary.com provides a good tool to determine whether a salary is reasonable.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.
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