The Wall Street Journal reported on a tax court ruling about 10 days ago against an S Corporation that has created a lot of anxiety for S Corp owners.
The issue is salary. We’ve talked about it a couple of times at USTaxAid. It’s one of the 3 things that can cause an audit for your S Corporation, so it’s important.
This particular Tax Court case involved an accountant and partner in an accounting firm. He had 20 years worth of experience and a graduate degree in tax, so it’ll be hard for him to say he didn’t know. His share of the profits from the accounting firm amounted to a little less than $230,000. Of that, he took approximately 10% in salary – or $24,000. There were actually two years under audit (at least so far) and those each showed the miniscule salary in comparison to the profit.
Inadequate salaries is one of the three top problems with S Corporation tax reporting. In this case, he ended up having to pay payroll tax on the entire distribution, as if it was all salary. Plus, of course, he paid penalties and interest.
If you’re concerned whether you’re taking enough in salary from your S Corporation, contact us at USTaxAid. We work with our clients on these and the other big red flags that can cost you big time in penalties and interest.
You can reach us by email, phone, fax or snail mail at: Contact Us
The other red flags are:
- Improperly reporting medical insurance for shareholders of an S Corporation, and
- Failing to track debt and equity basis if you company has a loss.
Don’t get caught!