S Corp Paying wages even being absentee owner

[Shane Veltri]

I am looking into buying a retail business that my friend will run and manage. I will do virtually nothing in the business but maybe some paperwork like tax prep. I want to run it as an S Corp and am wondering if there is a way since I dont work in the business if I have to pay myself a wage? Realizing that the IRS doesnt know if I dont work in it or not is concerning me. Maybe a different entity would be better? or Maybe I dont put myself as the President?  Not sure if there is a way to set this up that can accomplish me owning the business but not paying myself a wage.  Thanks for any help. 

[Ashish Acharya]

Shane,

Reasonable salary is for personal service actually rendered.  The Tax Court has ruled that the taxpayer is not an employee simply because he is the president if he performed no services in that capacity and received no payments for serving as a corporate officer.  Corporate officers who perform no services or only nominal services in their capacity as an officer and neither receive nor have claim to any compensation (direct or indirect) are not statutory employees.

You might not be considered an employee just because you are a corporate officer.  This is what Reg says: 

• "Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation."
• When determining whether services performed by a corporate officer are considered nominal or minor, IRS agents examine the character of the service, the frequency and duration of the performance, and the actual or potential importance or necessity of the services in relation to the conduct of the corporation's business.
  • Example: The officer of the corporation perform only minor ministerial functions entailing a few hours work a year for the corporations. The officer also receives no remuneration for the services he performs for the corporation. Because the officer satisfies both requirements for the exception from employee status (i.e., he performs only minor services and receives no remuneration), the officer is not employe of the corporation.

During your planning, depends on if you have another active source of the income you might want to consider this: 

• You also have to think about if you are materially participating in this business if your friend is running or managing it. There are other rules such as passive activity loss limitation and such if you are not materially participating. 
• Also, the income from the S-corp can be considered the investment income and subject to 3.8% NIIT tax if you don't materially participate.  ( if you make more than 250k if Married)

Please consult with your CPA. Thanks