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I’ve been involved in a lengthy discussion/debate with several CPA’s over the last week or so on the question of proper compensation for corporate officers and directors. What had been presented to me as fact was the position that the IRS requires all corporate officers to take a salary. I disagreed, and demanded the tax professionals who were advocating this position to provide me documentation that clearly proved that this was so.
Well, the documentation came. By the bucket. However, it did not tell me the same thing that they believe it told them. Because I actually read the IRS regulations that were given to me, I came to understand that the CPA’s were confusing a couple of disconnected ideas. My disagreement became even stronger, and I frankly dug in my heels. Common sense and experience tells me that thousands of companies exist – all with corporate officers readily on file – that don’t have any payroll. I have never read or heard of any cases in which the IRS took the position that officer’s salaries were mandatory.
Reading through the material that was given to me, I began to see how even experienced and qualified professionals can become easily confused by their desire to be fully compliant with our increasingly impossible tax code. In this case, they linked together a couple of seemingly-related principles that arrived at an erroneous conclusion.
The IRS clearly states that corporate officers are considered to be employees for Social Security and Unemployment purposes. I read that to mean that when wages are paid, the related withholdings are required. The tax professionals were reading that to mean that since officers are considered employees, the have to be paid a salary.
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However, issues of officers compensation have been dealt with by the IRS from two different standpoints:
- Excessive compensation by officers of large companies, which allow the company to take too large a tax deduction when they write off the payroll expense, and
- Too little compensation by officers of S corporations who attempt to funnel their wages into their pockets as dividends, thus avoiding withholding for Social Security, Medicare, and Unemployment.
In neither of these instances, however, has the IRS even come close to saying that officers salaries are mandatory. The tax professionals wouldn’t budge, and began seeking outside opinions from other CPA’s and tax instructors. Eventually, they came to the realization – slowly and somewhat stubbornly – that their stated position that all officers must be on payroll could not be justified. It was an obvious, but extremely frustrating conclusion from my perspective.
It left me with a better understanding of why someone could get to the point that they would want to fire their accountant in frustration.