Why this matters
Relevant facts can include duties, time devoted, experience, comparable pay, the company’s condition and compensation to other workers. The IRS can reclassify distributions as wages when compensation is unreasonably low.
Example
If the owner manages daily operations and takes distributions but no W-2 pay, the payroll treatment deserves immediate review. A passive shareholder’s circumstances may differ.
What to review
Document the owner’s work, comparable compensation, payroll records and distributions; revisit the amount as the business changes.
Official source: www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues