A tax warning to S corps

IRS audits now routinely review S corporation payments to shareholders to see if payroll taxes are being avoided by treating payments to shareholder-officers as loans or shareholder distributions of cash or property. A physician officer performing services for a corporation is entitled to payment; those payments are wages. For federal employment tax purposes, corporate officers are employees.

 

Avoiding employment taxes by treating compensation as cash distributions, expense reimbursements, or loans rather than as wages will get you in hot water. For clear details on the rules, go to the IRS Web site (www.irs.gov) and type in the Search Box, “FS-2008-25.” [Fact Sheet 2008-25]