Part 5/10:
However, the presenter stresses that the IRS requires "reasonable compensation" for the salary paid, to prevent abuse of this structure for tax avoidance. The determination of what constitutes reasonable compensation involves various factors, including your training, experience, responsibilities, and time devoted to the business.
Precautions and Audit Risks
While the tax savings are attractive, there are risks involved. The IRS tends to scrutinize S corp filings more closely, especially when a small salary is paid with large distributions. A common red flag is a very low salary compared to high total profits, as this may suggest an attempt to avoid payroll taxes.