S Corporation Shareholders Must Receive Salary for Services Performed

Here's a tidbit from TurboTax's technical folks:

"There are a few ways that a shareholder/owner can withdraw earnings from the business.

- distributions from S Corporation earnings
- wages or salaries
- repayment of loans
- reimbursement of expenses

Only salaries and wages are subject to payroll taxes (at about 15%), so the IRS says that shareholder-officers who are active in operating an S corporation must receive wages. The amount they are paid must be "reasonable" salary based on the several factors.

Once a reasonable salary has been paid, amounts in excess of a reasonable salary can be given out to shareholders as distributions. These distributions aren't subject to employment taxes.

IRS auditors will often look to see if a reasonable wage or salary has been paid to shareholder-officers and look to re-classify distributions as wages in order to collect payroll taxes."