_____ 3.S corporations have an incentive to pay unusually low salaries to an employee-shareholder to avoid FICA taxes.

Question

Quizplus · Accepted Answer

S corporations are pass-through entities where the profits and losses are passed to the shareholders to report on their personal income tax returns. If an S corporation pays a salary to an employee-shareholder, both the corporation and the employee-shareholder are required to pay FICA taxes (Social Security and Medicare taxes) on the salary. However, if the S corporation pays an unreasonably low salary to the employee-shareholder, the IRS may reclassify some of the profits as wages subject to FICA taxes. Thus, S corporations have an incentive to pay unusually low salaries to avoid FICA taxes.

_____ 3S Corporations Have an Incentive to Pay Unusually Low Salaries