S-Corporation Payroll Tax Dodge

The Eighth Circuit held yesterday that an experienced accountant must treat $91,044 as wages rather than the $24,000 that he claimed. In 2002, the accountant wage income of $24,000 but took home $203,651 in Subchapter S Dividends.

By setting his "wage" compensation, he only paid FICA employment taxes (combined rate of 15.3%) on the $24,000 wage and not on any of the additional $203,651 he took home as a "dividend." He was the corporation's sole shareholder/director/employee.

The court held that the $24,000 wage was exceedingly low and imputed to him a reasonable wage of $91,044 for the years in question.

Wages, to which FICA is applicable, are defined as "all remuneration for employment" IRC § 3121(a). The Court stated that special scrutiny is given to salaries paid to employees that control a corporation. The Court applied a substance over form analysis and determined that the taxpayer's experience, education and business revenue necessitated at least a $91,044 reasonable wage. Courts look beyond a business's tax reporting and looks at the entirety of the business's transaction with that employee to determine whether or not dividend income should be recharacterized as wage and FICA applied to it.

Conclusion: At the end of the day, a corporation should its service employees wage income that is reasonable remuneration for services performed. A service Corporation that has only one shareholder/director/employee cannot get away with paying its sole employee a wage that is far below reasonable.