S Corp Creates IRS Red Flag | USTaxAid

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S Corp Creates IRS Red Flag

Written by Diane Kennedy, CPA on March 31, 2008

The IRS tells us that the kinder, gentler days are gone. They are after you, looking for more tax revenue. The funny thing is that they tell the CPAs what the red flags are. Here’s one mistake you don’t want to make with your S Corporation. It’s a red flag says the IRS.

There are two ways that you can take income out of an S Corporation: (1) You can take it out as salary and (2) You can take it out as a distribution. The salary is subject to payroll taxes. The distribution is not. So, it didn’t take long for S Corporation owners to figure out it was better to take a distribution then a salary.

The rules say that an S Corporation shareholder needs to take a salary based on what would be reasonable to pay someone else who did that job. What’s left can then be taken as a distribution. The IRS is auditing anyone who has an S Corporation with a profit and that doesn’t show a salary to the officers. If they find that someone should have taken a salary, and did not, then they will claim that all distribution is subject to payroll taxes and hit you with a lot of interest and penalties. Be careful of this one!

The IRS is getting tougher. It has never been more important to make sure you have good records, solid accounting and check in with your DKAffiliated CPA more than just once a year.

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