There are categories of business entities responsible for paying shareholder-employee reasonable compensation. An S Corporation[1] is one such corporation. An S Corporation is defined as a type of corporation that elects to be taxed under a section of the U.S. Internal Revenue Code. “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee” (IRS.gov, “S Corporation Compensation and Medical Insurance Issues,” 8/31/2013). The shareholder cannot receive an amount of S Corporation reasonable compensation that exceeds the amount the shareholder receives either directly or indirectly.
Key Takeaways
- There are categories of business entities responsible for paying shareholder-employee reasonable compensation.
- The IRS bases provisions with regard to S Corporations on multiple court cases.
- Determining S Corporation reasonable compensation must first be established by evaluating what the shareholder-employee did for the S corporation.