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Tax Law (Questions About Taxes)/S-Corp Officer Compensation when shareholder has no involvement

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QUESTION: If I am a 100% shareholder of an S-Corp but has no involvement, while my wife (0% shareholder) run the business full time and pay herself through payroll, do I also have to pay myself through payroll?


So I am 100% shareholder of my S-Corp with little involvement as I have a full-time job in another entity but is listed as an officer of the company. My wife owns 0% shares but is the active manager, employee, and officer of the company. My wife receipt payroll and payroll taxes are deducted. We file a joint tax return.

1. Since my wife is already receiving compensation through payroll as an officer, do I still have to pay myself compensation through payroll as well? Especially when we file a joint tax return, so we are in a way paying payroll tax as a joint tax filer and officer of an S-Corp.

2. If the current structure doesn't work and could be of issue to the IRS, could I then just make her a 2% owner so that we can check the box on paying payroll tax to 2% shareholders/officers?  Currently that box of compensation to 2% shareholder is blank and I am a bit afraid of what the IRS will think, but the truth is I (100%) shareholder have no involvement and the 0% shareholder officer (my wife) runs the business full time.

Answer
Only persons that have an active role in the business are expected to have a W-2.  

Investors do not get a W-2 if they did not actually work in or for the corporation.

Your wife still may count as a 2% shareholder because the ownership is less than an "arm's length" from you, meaning she is married to the 100% shareholder and this does not exempt her from the 2% ownership rules.  

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Randall Klein, MBA, EA

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I am an expert in personal and small business taxation, including Forms 1040, 1120, 1120S, 1065. I can answer any type of tax question except those that are requesting help in illegal tax evasion. Tax avoidance is legal, however. I do not do offshore trusts, or opt-out of the tax system type of queries.

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