This strategy is supposed becoming limited by an Internal money services rule requiring business owners to pay for on their own “reasonable compensation” in the shape of wages or salaries.

This strategy is supposed becoming limited by an Internal money services rule requiring business owners to pay for on their own “reasonable compensation” in the shape of wages or salaries.

If a company paying an unreasonably low salary to the owner try audited, the IRS could possibly recharacterize income as earnings and impose payroll taxes.

But whether a salary settled to oneself is “reasonable” is a fuzzy traditional, enabling a great amount of leeway. A report by Congress’s investigative arm, government entities Accountability company, found that, “The vagueness of national tax law on determining enough salary settlement investors mean that the facts and conditions need to be examined in each case.” The “difficulty and subjectivity in deciding just what constitutes a sufficient wage enables some S-corporations to pay for insufficient wage payment,” which results in a lot of income treated as income that are free of payroll taxation.