Brown & Streza Blog
By David Keligian on 5/28/2014 8:52 AM
The Salary Whipsaw. What is being “whipsawed”? As far as the IRS is concerned, it means them taking different positions on an issue depending on what position results in the most tax. One emerging area where the IRS “whipsaws” taxpayers involves what constitutes a “reasonable” salary.

A “reasonable” (i.e. deductible) salary for income tax purposes is really a factual question. Multiple factors can be considered—education, experience, company size, industry, operating results, and “market” salaries. Issues involving “all facts and circumstances” are always the hardest to argue with the IRS and Franchise Tax Board (“FTB”). But on the salary issue, the IRS devotes much more attention than the FTB to the issue.

The reason has to do with the high level of federal employment taxes (Social Security, Medicare, FICA, and FUTA). A good example of the salary “whipsaw” involves a comparison of a sole shareholder owned C-corporation to a sole shareholder owned S-corporation.

C Corporation Example....