The Internal Revenue Service (IRS) recently issued Fact Sheet FS-2008-25, which discusses S corporation officer compensation. Corporate officers, whether in S corporations or C corporations, are generally considered employees of the corporation. Officers who perform only minor services or no services and are not entitled to and do not receive compensation are not considered employees.
As an employee, officers who are also shareholders must receive a reasonable salary to the extent that distributions or other payments are made to the officer-shareholder. Factors considered when determining when compensation was reasonable have included the following:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
The S corporation should deduct as fringe benefits any health and accident insurance premiums paid for so-called “2% shareholders”. The amount of the premiums is taxable to these shareholders for income tax purposes, but not for FICA or FUTA.
Pursuant to IRS Notice 2008-1, a medical plan is “established by the S corporation” even if the plan is in the name of the shareholder as long as the S corporation pays the premium or reimburses the shareholder for the premium payment.
Box 14 on the Form W-2 may be used to provide the shareholder with the amount of the premiums paid, but the income should only be reported on Form W-2 and not on either Form 1099 or Schedule K-1. Contact Vision Payroll if you have any questions on Fact Sheet FS-2008-25.