Do you have a lot of medical bills that you pay on each month? Could those medical bills be deducted from your tax bill this year? I was helping my mother take care of all of her finances after my dad passed away. I didn't realize how many bills she had coming in each month for medical treatments that my dad had undergone months, even a year earlier. I started doing some research about medical bills and tax deductions. If you have medical bills, take a minute to read through this blog to gain some knowledge that can help you decide what you can do when tax time comes around.
S-corporations have their taxes handled in a manner that is different from other types of corporations. They do not have any federal income taxes levied on them at the corporate level. Instead, the shareholders are responsible for paying taxes. However, shareholders can run into trouble if they are also employees of the company and aren't paid a reasonable salary.
The S-corporation files a Form 1120S. This form shows how income and deductions are allocated among all of the members of the shareholders. The shareholders are not required to pay a self-employment tax on their portion of the earnings. However, to qualify for no self-employment tax, any shareholder who is also an employee must be paid a reasonable salary. He or she must then pay Social Security and Medicare taxes.
Determining a Reasonable Salary
One of the challenges is to determine what is considered a reasonable salary since there are no specific rules, but there are many factors you should consider, such as the number of hours that the shareholder devotes to his or her job.
The shareholder should be paid a salary that is reasonable based on the responsibilities he or she holds and the amount of training and experience necessary to carry out these responsibilities.
Fortunately, all of this can be compared to the wages of the non-shareholder employees to get a sense of what is reasonable. If the shareholders are being paid substantially lower than the non-shareholder employees, this might attract attention from tax collectors.
Also, look at the comparable pay of other businesses. If your corporation is informed that a shareholder is not being paid enough, but there are several examples of employees from other companies with similar responsibilities being paid the same salary, this can be used as evidence that the salary is more reasonable. Fortunately, there are websites that list salaries for comparable positions to help guide a company in determining what a reasonable salary would be for a shareholder. Also, make sure to report salaries properly to the IRS.
Working with Corporate Tax Prep Services
Because there can sometimes be IRS court cases over a reasonable salary, it's important to work closely with corporate tax prep services that can help your business have its taxes in order. When a shareholder is not paid a reasonable salary, this can be seen by the IRS as an attempt to pay less than one is owed.Share