TAX COURT RULES S CORP PAYOUTS ARE WAGES

April 1, 2021 by TxSEA
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We all know that our S Corporation officers need to pay themselves reasonable compensation. We know that they take
distributions or other withdrawals out of their company that well exceed their salary, assuming they even took a salary.

We also know that the IRS is quick to jump on these withdrawals and the Tax Court stepped in to offer some clarity.

In the following case, the woman was, to be blunt, a hot mess. But the case does point out how the tax court agrees with

the IRS.

In the case of Ward, TC 2021-32, 3/15/21, the Tax Court agreed that payments made from a law firm to its sole

shareholder were indeed payroll for tax purposes.

She was an attorney in Minneapolis operating her own law firm as an S Corporation where she was the sole shareholder.

For 2011 – 2013 she had one attorney working with her who she did run payroll for, but she herself did not report any

wages.

Here is where the problem is (or at least how I read the case):
In 2011, she reported $62,000 paid to her as wages, but did
not report the income personally.
In 2012, she reported $73,000 as income, but not as wages on the S Corporation. Then
in 2013, she reported some payments as wages and the remaining $48,000 as other income.

The judge in the case basically summarized that it is highly unlikely that an attorney, the sole shareholder operating the S

Corporation, did not provide legal services that should be treated as wages.

Notice 2021-23 explains the changes to the Employee Retention Credit for the first two calendar quarters of 2021

including:

• Increase in the maximum amount

• Expansion of the category of employers that may be eligible

• Modifications to the gross receipts test

• Revisions of definition of qualified wages

• New restrictions to request advance payments

TAX COURT RULES S CORP PAYOUTS ARE

WAGES

IRS PROVIDES GUIDANCE FOR EMPLOYERS

CLAIMING THE EMPLOYEE RETENTION

CREDIT FOR FIRST TWO QUARTERS OF 2021

LINK TO CASE MEMO

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