Compensation paid to a shareholder and subsequently recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation and the receiving shareholder.

Question

Quizplus · Accepted Answer

Recharacterization of compensation as a dividend affects not only the income tax liability of the corporation and the shareholder but may also have implications for payroll taxes, as dividends are not subject to payroll taxes like compensation is.

Compensation Paid to a Shareholder and Subsequently Recharacterized by the IRS