M. T. Mullins, LLC, lawyers in Prescott, AZ, Arizona

S Corporation Officers as Employees

Generally, officers of a corporation are employees for employment tax purposes, and their compensation is wages. Thus, their wages are subject to social security, Medicare, and federal unemployment taxes along with withholding for federal income tax purposes. Only a corporate officer who does not perform any services or who performs only minor services and who neither receives nor is entitled to receive, either directly or indirectly, any compensation is not considered an employee.

Some S corporations, in an attempt to avoid employment taxes, have handled payments for services made to officers as corporate distributions rather than wages. The Internal Revenue Service and many courts have concluded that this treatment is improper and that S corporation officers are employees for employment tax purposes.

The foundation for the government's conclusion is that the characterization of any payment for services as a distribution of S corporation net income rather than wages is a subterfuge for reality. No matter how an employer chooses to characterize payments made to its employees, the true analysis depends on whether the payments were in actuality compensation for services rendered.

In numerous cases, courts found no reasonable basis for treating the corporate officers receiving payments for services as anything other than employees. The courts consistently held that S corporation officers/shareholders who provide more than minimal services to their corporation and who receive compensation are employees whose wages are subject to federal employment taxes.