Corporation Officers by dkr15656


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                                                 Information especially for employers


                                                                                                                                             spring 2009
                                                          published quarterly by the Utah Department of Workforce Services •

                                     Wage Compensation for
                                     Corporation Officers
                                       The Internal Revenue Service (IRS)        Who is an employee of the corporation?
                                       defines when payments to corporate        Generally, a corporate officer is a corporate em-
                                       officers constitute wages. The Utah       ployee. Courts have held that “S” corporation of-
                                        Employment Security Act and asso-        ficer/shareholders who provide more than minor
                                       ciated Administrative Rules defer to      services to their corporation and receive or are
                                  the IRS interpretation. In other words,        entitled to receive payment are employees whose
                                  corporate officer wages reportable for         compensation is subject to employment taxes.
                                 IRS purposes are also reportable for state
                                unemployment insurance. Corporate offi-
                                                                                 What is a reasonable salary?
                                                                                 The IRS Form 1120S instructions state that, "Distri-
                                cers are specifically included within the
                                                                                 butions and other payments by an "S" corporation
                                 definition of employee for FUTA (Federal
                                                                                 to a corporate officer must be treated as wages to
                                  Unemployment Tax Act) and the Utah
                                                                                 the extent the amounts are reasonable compensa-
                                   Employment Security Act. When cor-
                                                                                 tion for services rendered to the corporation."
                                    porate officers perform services for the
                                     corporation and receive or are entitled     No specific guidelines for reasonable compen-
                                      to receive payments, their compensa-       sation exist in the Code or the Regulations, al-
                                     tion is considered wages. All corpora-      though some factors considered by the courts are
 in this issue:                   tions should treat payments for services       listed in the box below. Reference to this subject
                      to officers as wages and not as distributions of           can be found at:
• Wage Compensation                                                              article/0,,id=200293,00.html and at www.rules.
                      cash and property or loans to shareholders.
  for Corporation                                                      
  Officers            "S" corporations elect to pass corporate income,
                      losses, deductions, and credits through to their                                  FACTORS
• SUTA Dumping        shareholders for federal tax purposes. Sharehold-
  Revisited           ers of "S" corporations report the flow-through of          • Training and                 • Timing and manner
                      income and losses on their personal tax returns               experience                     of paying bonuses
                                                                                                                   to key people
                      and are assessed tax at their individual income tax         • Duties and
                      rates. The Utah Employment Security Act makes                 responsibilities             • What comparable
                      no distinction between “S” and “C” corporations.                                             businesses pay for
                                                                                  • Time and effort
                                                                                                                   similar services
                      Payments to corporate officers must be reported if            devoted to the
                      services are provided.                                        business                     • Compensation
                                                                                  • Dividend history
                      The Internal Revenue Code and the Utah Employ-                                             • The use of a formula
                      ment Security Act establish that any officer of an          • Payments to
                                                                                                                   to determine
                      “S” or a “C” corporation is an employee of the cor-                                          compensation
                      poration for employment tax purposes.
SUTA Dumping Revisited
            hat is SUTA dumping? SUTA dumping is the prac-            Section 35A-4-304 (
            tice of circumventing or manipulating a state’s           htm/35A04_030400.htm) of the Employment Security Act
            Unemployment Tax Act (SUTA) experience rating             includes specific provisions governing the transfer of unem-
system to qualify for a reduced tax rate. This may occur by           ployment experience and contribution rates.
moving or eliminating ("dumping") Unemployment Insurance
(UI) benefit charges from the employer’s tax rate calculation.        •	   The unemployment experience attributable to each em-
This illegal practice offers an employer a lower tax rate. It also         ployer will be combined when an employer transfers all
shifts the tax burden to the remaining employers who now                   or part of its trade or business (including its workforce) to
must pay higher tax rates. State legislation enacted in 2005               another employer and common ownership, management,
was designed to prevent SUTA dumping in compliance with                    or control of the employers exists during the transfer.
corresponding federal legislation.                                    •	   Each entity will receive the same UI tax rate for up to four
Employers who have higher UI charges for benefits paid to                  years.
former employees typically have higher UI tax rates than em-
                                                                      •	   The law also provides meaningful civil and criminal
ployers who maintain stable workforces. In a typical SUTA
                                                                           penalties for individuals, including tax advisors, who
dumping scenario, among several that exist, an employer es-
                                                                           knowingly violate or attempt to violate any provision of
tablishes one or more “shell” companies before transferring
                                                                           the legislation.
all or part of its payroll to a shell that has a lower UI rate. The
former company’s experience is “dumped,” the employer’s               Utah utilizes an automated system to detect employers who
tax liability is reduced, and all employers must offset the lost      may be involved in UI tax rate manipulation schemes. The
revenue by paying higher “social costs.” The law ensures that         state is committed to protecting the UI trust fund and ensur-
employers with higher unemployment experience risks are               ing that all employers pay their rightful amounts.
accountable for them while employers with low unemploy-
ment risks are protected.                                                  What is an employer required to do? All parties involved
                                                                                 in a transfer must notify the UI Contributions Divi-
                                                                                        sion within 30 days of the transfer by com-
                                                                                             pleting a Form 1 found at our web site
                                                                                                         or requested by phone. For
                                                                                                             questions, contact us at


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