Shareholder employees in a corporation must receive reasonable compensation according to the IRS. This means that their compensation can be adjusted if it is too high or too low. While there is no firm set of rules to measure the reasonableness of compensation, there are some regulations in place to ensure that these shareholders get the fairest compensation possible. There are many factors that could affect the tax court’s ruling in a reasonable compensation case including, but not limited to:

• The role that the shareholder-employee plays in the company include hours worked, the duties they perform, and their overall qualifications for the position.
• The financial condition and character of the corporation itself. This also includes the size and complexity of the business.
• The current compensation of the employee compared to the compensation of people in similar positions at other companies.
• The likelihood that a potential investor would still foresee a return on investment, after the shareholder’s compensation is considered.
• The current conditions of the economy.
• The compensation paid to the employee in prior years and his/her salary compared to shareholder distributions.

For the tax court to make a decision regarding a shareholder employee’s compensation, they will look at a combination of these factors; no single factor will affect the outcome by itself. If you have questions regarding reasonable compensation, contact the accountants at Steven J. Wick in Fort Collins today!