• Provide more than minor services to their corporation
• Receive, or are entitled to, receipt payment

are employees whose compensation is subject to federal employment taxes.

Under an exception in the Regulations, an officer who meets the following criteria is NOT an employee:

• Does not perform any services, or performs only minor services, in his or her capacity as an officer
• Does not receive, and is not entitled to receive, any remuneration, directly or indirectly

WHAT IS A REASONABLE SALARY?

The Form 1120S instructions state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
The amount of compensation cannot exceed the amount received by the shareholder either directly or indirectly; however, if the shareholder received cash or property, or had the right to receive cash and property, a salary amount must be determined, and the level of salary must be reasonable and appropriate.

The following factors have been considered by the courts in determining reasonable compensation:

• 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
• Use of a formula to determine compensation

Jennifer Harris
Jennifer A. Harris, CP A & Associates, Inc.