Shwiff, Levy & Polo Advises S Corporation Officers

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Shwiff, Levy & Polo advises S corporation officers how to determine when the IRS considers an Officer an employee.

Shwiff, Levy & Polo advises S corporation officers how to determine when the IRS considers an Officer an employee. Many S corporation officers are not considering themselves "employees" of the S corp, in order to avoid concurrent payment of federal employment taxes by changing the character and nature of the money received (for example, dividend to a shareholder). This can result in additional tax, interest and penalties if reclassified during an audit, particularly difficult during the current economic crisis and the hostile IRS enforcement environment we are currently finding ourselves in.

The IRS has published statements about shareholders of S corps who also provide services to that S corp to clarify who is an employee of an S corp. and their form of compensation. The IRS has clarified that the definition of an employee includes corporate officers. Therefore, when a corporate officer performs a service for the corporation and receives or is entitled to receive compensatory payments, those payments are considered an "employee" type of wages/salary, which require withholding for FICA and federal income tax and payment of FUTA.

The fact that a person working in an officer/managerial position also happens to be a shareholder does not change his/her "employee" categorization or the categorization for the compensation for services provided. These payments are considered "wages".    

The Tax Courts have consistently upheld that S corporation officers/shareholders who provide more than minor services are subject to the wage definition and to federal employment taxes. The opinion of the Courts is that an officer would not be considered an employee only if he/she does not perform any types of services - or only very minor services - and thus is not entitled to any type of remuneration compensation. Thus the facts of all other situations need to be analyzed very carefully and compared to this latest IRS clarification of the law.

This new IRS clarification is actually more onerous than first thought. Even for non-working shareholders (like family members) the Courts have ruled that officers/shareholders be classified as employees and are therefore subject to employment taxes even when the officers and shareholders/employees receive compensation only in the form of distributions, dividends or other forms of compensation instead of wages. The IRS reclassified these payments as "wages".

The IRS has identified and considers numerous factors in the definition of (the real nature of) compensation, including:

  • training and experience
  • duties and responsibilities
  • time/effort given to the business
  • dividend history
  • payments to non-shareholder employees
  • timing and manner of paying bonuses to key people
  • benchmarking comparable businesses paying for similar services

Shwiff, Levy & Polo (http://www.slpconsults.com) recommends seriously considering any and all types of payments made to S-Corporation officers and shareholders in light of this new clarification by the IRS.

Elizabeth Shwiff
Shwiff, Levy & Polo, LLP
(415) 291-8600 x232

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Elizabeth Shwiff
Shwiff, Levy & Polo, LLP
(415) 291-8600 ext. 232
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