Advanced individual taxation
The Compensation and Fringe Plan
Pay owners by the entity rulebook: reasonable S-corp wages, no excessive C-corp pay, guaranteed payments deducted, and 2-percent-shareholder fringes taxed.
How the exam words it
- -The stem gives S corporation net income and comparable salaries and asks how to split wages and distributions to minimize payroll tax legally.
- -It shows a C corporation paying an owner far above comparable pay and asks about the excess, pointing to a constructive dividend.
- -It describes a fixed payment to a partner for services and asks whether it is a guaranteed payment or a distribution.
- -It has an S corporation pay a more-than-2-percent shareholder's health premiums or reimburse expenses and asks about the tax treatment.
The playbook
- 1Set reasonable S corporation wages subject to FICA, then route the remaining profit as distributions free of payroll tax; too little wage is recharacterized.
- 2Deduct only reasonable C corporation compensation, and recharacterize excess pay to a shareholder-employee as a nondeductible constructive dividend.
- 3Treat a guaranteed payment as deductible by the partnership and ordinary income subject to SE tax to the partner, not a basis-reducing distribution.
- 4Add a more-than-2-percent shareholder's health premiums to W-2 box 1 wages (not FICA), deduct them above the line, and keep reimbursements tax-free only under an accountable plan.
The trap
Taking zero S corporation wages to dodge FICA, or letting a C corporation deduct clearly excessive owner pay. Reasonable wages are required, and excess C corporation pay is a nondeductible dividend.
How the exam varies it
The same pattern, re-skinned along these axes:
S corporation reasonable wage versus C corporation excessive-compensation recharacterizationGuaranteed payment versus distributive-share distributionMore-than-2-percent shareholder fringe benefits and accountable-plan reimbursements
Drill this pattern
8 questions of The Compensation and Fringe Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.