Accounting & Business Services

June 1, 2005

As you may be aware, President Bush has been pushing for the reform of our Nation's Social Security system.  In conjunction with the Presidential review of the Social Security system, the IRS has recently announced that it will be scrutinizing the salaries shareholders are taking out of their S corporations.  Reducing shareholder salaries and increasing shareholder draws reduces payroll taxes, but can be inappropriate depending on the circumstances.  According to IRS guidelines:

•  A shareholder of an S corporation that works for the S corporation is treated as an employee and needs to be paid "reasonable compensation" (subject to payroll taxes) before the shareholder can take any draws or other non-wage distributions

• In order to find out if compensation is "reasonable compensation"  as defined by the IRS, you need to determine if the salary you are paid by your S corporation is reasonable based on the amount and type of work you perform for the corporation

• The IRS can reclassify distributions to shareholders as wages and impose penalties on late payroll taxes related to the wages

We will continue to make sure that you stay within IRS guidelines and that your 2005 compensation is appropriate.

For More Information Contact:

Accounting & Business Services, Inc.
5N282 Baker Lane
Tel: (630) 377-5090
FAX: (630)377-5390