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Reasonable Compensation for Corporations

Reasonable Compensation for Corporations

The Internal Revenue Service (IRS) may conduct a reasonable compensation audit to determine if a corporate officer who is also a shareholder was paid a reasonable salary as an employee for services performed. It is generally not correct for an officer of a corporation to only receive distributions and no salary.


Failing to pay a salary means that payroll taxes were not withheld and paid over to the government in violation of the Internal Revenue Code. In the event a salary was paid to an owner that was too low or no salary was paid at all, it can lead to a tax controversy with the IRS in the form of a tax audit. This often ends with additional tax assessments.

Alternatively, if a corporate shareholder/officer is paid too high of a salary, this may also lead to problems during an IRS audit of certain corporations.


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