Video Tips: Reasonable Compensation for S-Corp Shareholders
Determining a reasonable salary for an S corporation shareholder is required and may be one of the most difficult tasks related to S corporation accounting and tax preparation.S corporation shareholders enjoy tax advantages not available to owners of other entity types. Only the portion of their cash distributions that is characterized as reasonable compensation (W-2 wages) is subject to payroll taxes while the profits passed through on the K-1 are not subject to self-employment (SE) tax. Compare that to a partnership where the entire profits of general partners are subject to SE tax.
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