Hear this out loudPauseWhen corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.
How are corporate shareholders compensated?
Hear this out loudPauseOther business entities (specifically corporations) compensate owners by distributing dividends from business profits. Unlike flow-through profits, payment of dividends is generally a decision by the board of directors and does not represent all profits of the corporation.
How do corporate owners get paid?
Hear this out loudPauseSole proprietors pay themselves on a draw, partnership owners pay themselves on guaranteed payment or distribution payments, and S and C corporations pay themselves on salary or distribution payments. All pay is generally taken from the business’s profits.
When does a corporate officer become a shareholder?
When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages. The fact that an officer is also a shareholder does not change this requirement. Such payments to the corporate officer are treated as wages.
How are S corporation employees and shareholders treated?
Such payments to the corporate officer are treated as wages. Courts have consistently held S corporation officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes.
Can a shareholder be an employee of a company?
The Sixth Circuit held that a shareholder-employee of a company used the company bank account for personal use. As such, the Court ruled the shareholder was an employee and owed employment tax. Joly v. Commissioner, T.C. Memo. 1998-361, aff’d by unpub. op., 211 F.3d 1269 (6th Cir. 2000).
What makes an employee an employee of a corporation?
The definition of an employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code include corporate officers. When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages.
