S Corporation Officer’s Compensation

An IRS fact sheet discusses compensation paid to S corporation officers for services rendered, which should be treated as wages and not as distributions or loans to the officers. While there are no concrete guidelines for determining when compensation is reasonable, some of the factors considered by the courts are (1) the officer's training, experience, duties, and responsibilities; (2) the time and effort devoted by the officer to the business; (3) the company's dividend history, payments to non-shareholder employees, and timing and manner of bonus payments; (4) what comparable businesses pay for similar services; (5) the existence and content of compensation agreements; and (6) the use of a formula to determine compensation. Furthermore, health and accident insurance premiums paid for greater-than-2%-shareholder-employees are deductible by the corporation as fringe benefits, and are wages for income tax withholding but not for FICA or FUTA purposes. Fact Sheet FS-2008-25.

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