If the amounts are reasonable, salary payments to shareholder-employees can reduce or avoid the double taxation result of a C corporation.

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By paying a reasonable salary to shareholder-employees, the C corporation can deduct the salary as an expense, which reduces the corporation's taxable income. As a result, there is less profit subject to corporate tax, and hence, less tax liability. The shareholder-employees, on the other hand, will pay income tax on their salary, which is only subject to individual tax rates and not subject to corporate tax. Therefore, reasonable salary payments can reduce or avoid the double taxation effect of a C corporation.

If the Amounts Are Reasonable, Salary Payments to Shareholder-Employees Can