Question

What is the incentive for S Corporation Shareholders, who also work in the company, to receive an unreasonably low salary?

Question 4 options:

	A) S Corporation shareholders can not be employees
	B) reduce employment taxes
	C) reduce income taxes
	D) reduce overall taxes

Answer 1

An S corporation shareholder clearly has an incentive to minimize wage compensation. This creates a larger profit that is not subject to employment taxes. The S corporation profit is subject to only regular income tax payable by shareholders.The IRS will not object to the S- Corp making zero payments to the owner employee when the business is earning little or no income. But, when the business is making money, it must first pay the owner-employee a reasonable compensation before making any payroll tax-free distributions with any excess funds.

The answer is option d. they reduces overall taxes.Conversely, S corporations are required to pay W-2 wages to a shareholder who is actively engaged in providing services to the business. And, those W-2 wages are subject to payroll taxes such as Social Security and Medicare, collectively known as FICA taxes. These FICA taxes are paid by both the entity and the recipient (i.e., the government generally receives double the computed FICA taxes).Shareholders of S corporations, as opposed to partners in partnerships, are viewed as investors – not active participants in the production of income presumed to “[be] engaged in carrying on the corporation’s trade or business.” Therefore, the pass-through income of an S corporation is not subject to the self-employment tax at the individual level that applies to partnership income.