This posting by Kelly Phillips Erb as a contributor for Forbes does a nice job of spelling out the S Corporation reasonable compensation issues with the IRS and the recent CPA S Corporation court case that raised Watson’s payroll from $24000 per year to $91000 (but on income averaging $180000 to $200000 for two years, or less than 50% a year on average):
http://www.forbes.com/sites/kellyphillipserb/2012/03/25/taxes-from-a-to-z-u-is-for-unreasonable-compensation/
Here is a link to the Watson case that is also in the article:
http://www.scribd.com/doc/86679355/Watson-v-US
I think one of the really great points this article makes is to come up with a documented calculation of how the compensation was arrived at and why it is reasonable. Just saying ‘it seemed about right’ just will not cut it in an IRS comp audit and there are going to be more of these in the future as ways to balance out social security and medicare are looked at. I know I have been beating this issue to death but if you have a small S Corp in the future this may really affect you and you need to do some planning with your tax professional to keep out of the woods on this.
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