Question1. I am a 50% shareholder in an S Corporation. I have heard this talk about reasonable compensation. What is it?

Answer: Generally, an officer of a corporation is considered an employee of the corporation and must be compensated with a salary, even if that officer is a shareholder of the corporation. The IRS rules require that shareholders of S Corporation who provide services to the corporation and receive remuneration from the company must receive a salary from the company. As you may know, the S corporation profits flow down to the shareholders' tax return and these profits are not subject to payroll taxes. Thus, the IRS requires that shareholders who perform services for their corporation must receive a salary that is subject to payroll taxes. There is an exception in cases where the shareholder is only providing minimum services. The concept of reasonable compensation has been argued in courts several times in various tax cases and the courts have established their judgements based on various criteria such as training, duties and responsibilities, time devoted to business, compensation paid to other employees etc. but there is no clear guidance in IRS rules on what is considered reasonable compensation.