It is not uncommon for to see S corporation stockholder treat all their compensation as pass-through income thereby circumventing Social Security and Medicare taxes.

The IRC establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

However, an officer who performs no services or only minor services and who neither receives nor is entitled to receive any pay is not considered an employee.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. The following are some factors used by courts to determine reasonable compensation.

Practitioners should counsel their clients to seek professional assistance in determining reasonable compensation. There are firms that have the data necessary to determine reasonable compensation, and in JD & Associates, Ltd. v. United States, the IRS used Risk Management Association (RMA), an expert in the field of reasonable compensation, for data to determine reasonable compensation.

There is a firm that advertises their services to the tax preparation community by the name of RC Reports. Others can also be found by searching the Internet.