A Owner Compensation Tax Effects Essay - 1437 Words

A. Owner Compensation Tax Effects Individuals classify salary as money received every payday, however, the term is slightly different for business owners. Business owners are customarily compensated based on which business entity is elected. Business owners of sole proprietorships and partnerships are not entitled to actual salaries, but they receive profit distributions from business operations. Profits from a partnership are further divided up based on each partner’s percentage ownership. They are not responsible for paying the FICA tax, but they need to pay self-employment taxes and quarterly estimated taxes. Business owners of C and S corporations are compensated in one of two ways: salaries or dividends as a shareholder. In addition to receiving a reasonable salary, payment of Social Security and Medicare taxes are expected. Business owners prefer to be compensated with cash salaries, dividends, or distributions (How Business Owners are Paid by the Business 2016). Before compensation can be distributed to a business owner of an S-corporation, the amount in question must be something that the IRS will see as reasonable. Reasonable compensation is not to be over the money received by a shareholder in relation to his or her business involvement. The IRS determines a shareholder’s affiliation by matching up specific job functions to one of three major sources for collecting inflows. The first major source includes the services performed by the shareholder (i.e.Show MoreRelatedBusiness Structure Of C Corporation Essay1097 Words   |  5 Pagesstructure separately and any attempt to understand business structure must consider the C-corporation as a baseline against which to compare subsequent business structures. A C-corporation is a business organized as a separate entity from the owner or owners of the business that requires the observation of certain formalities. 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