So, you got tired of being a Schedule C sole proprietor and paying all that self-employment tax! So, you formed an S Corporation and now you have no self-employment tax. You just take draws from the corporation so no self-employment tax. What is wrong here?
Have you ever heard of an audit flag?
This is when the IRS focuses on specific circumstances. Well S Corps who do not pay a reasonable salary to a corporate owner is a new audit flag.
A S Corp needs to have reasonable compensation calculated.
Reasonable compensation needs to be calculated and kept in the file. Don’t just make a guess. It is a very complex calculation and needs expert assistance. There are avenues you can use to obtain that information too.
Will An S Corp owner will get a W2?
At the end of the year as an employee. Some of the distributions will not be subject to self-employment tax as well. Basically, you pay reasonable compensation throughout the year and make distributions as cash is available.
A S Corp who obtains a Reasonable Compensation report is in good shape in an audit. Just show the IRS the Reasonable Compensation report and your compensation should not be challenged.
If you have not received reasonable compensation or have questions feel free to reach out to us for assistance.