This is a complex subject and our profession has difficulty coming up a firm answer to this question. What I have experienced is that we should follow the IRS guidelines as to what appears to be reasonable salary.
My approach is to always claim a reasonable salary whenever it comes to an S Corp. The danger is you invite an IRS Audit if yon have no salary and substantial pass through income, and if that happens the IRS will assses a reasonable salary, and charge the corporation penalties and interest on delinquent payroll taxes., plus a possible substantial penalty for gross negligence to the owner of the S corporation. Has this ever happened? Yes, and there are substantial cases on record. and recently IRS has hired 1,600 new auditors to curb S Corporation abuses.
So please beware of this recent action by IRS to pursue S Corp. abuses, the chances are you might be audited too. Also, remember claiming a payroll check is the right approach and a W-2 Salary has a lot of advantages in terms of Pension planning and gaining business loans.
Last edited by TaxGuru : 02-07-2007 at 05:50 PM.