S corporation officers must view payments for services as wages.

Remuneration paid to S corporation officers may not be paid on form 1099

Expert tax adviceThe Internal Revenue Code establishes that officers who perform services for an S corporation must treat their remuneration as wages. Furthermore, S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and loans rather than as wages. Otherwise, the S corporation would be underpaying employment taxes.

Because, an officer is a shareholder does not change his status as an employee. Consequently, any remuneration paid to him for services rendered must be treated as wages. No matter if it is a single owner business or a multinational S corporation the rule still applies. Regulations do provide an exception for an officer of an S corporation who does not perform any services or performs only minor services and who is not entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee. Under all other circumstances, all payments to that shareholder must be treated as wages.

In addition, the service further states that wages paid to an officer/shareholder must be reasonable. While there are no specific guidelines for reasonable compensation in the Code or the Regulations these guidelines should be observed:

    • Training and experience
    • Duties and responsibilities
    • Time and effort devoted to the business
    • Dividend history
    • Payments to non-shareholder employees
    • Timing and manner of paying bonuses to key people
    • What comparable businesses pay for similar services
    • Compensation agreements
  • The use of a formula to determine compensation

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