The government keeps chipping away the tax savings strategy of S corporations. As you know wages are subject to payroll taxes whereas distributions from S corporations are not. Here is a new case which the IRS prevailed in court.
The court determined that the IRS may recharacterize dividend payments to S shareholder-employee as wages. The district court has concluded that an S corporation shareholder-employee's $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments. Watson, P.C. v. U.S.
I estimate that the this cost the taxpayer and the corporation a total of $21,000 to $30,000 in additional tax for the two years.
