C Corporations • Payments to shareholder-employees (owners who work in the business) are deductible wages or salaries to the corporation. • These wages are taxable income to the employee (shareholder) when received. • Payments must be reasonable and for necessary services; the IRS can reclassify unreasonably high salaries as dividends to prevent avoiding corporate taxes. S Corporations • S corporation shareholder-employees are paid wages or salaries, which are deductible by the corporation and taxable to the employee. • Salaries must be reasonable and for necessary services. This is less strictly enforced than with C corporations, but the IRS may still challenge artificially low salaries used to shift income to shareholders in lower tax brackets.
• Fringe benefits paid for shareholders owning more than 2 percent • 2 percent of stock must be included as income to those shareholders.
Special Considerations Property (like stock) received for services is subject to special tax rules. Business owners should consult a tax advisor before making such transfers. Additional Notes • The recent One Big Beautiful Bill Act (OB3) includes changes affecting compensation, such as new limits on deductions for certain executive pay and new tax deductions available for qualified tips and overtime compensation for workers (2025–2028). • Employers should ensure reasonable compensation practices to avoid IRS penalties and tax reclassifications. Employment Taxes and Workers’ Compensation Insurance Businesses with employees are responsible for several types of taxes and insurance related to employment: • Employment Taxes: These include income tax withholding, Social Security and Medicare taxes (FICA), and federal and state unemployment insurance taxes. • Workers’ Compensation Insurance : This insurance covers employees for work-related injuries or illnesses. While not a tax, it is required for most employers in Minnesota.
37
Made with FlippingBook - Online Brochure Maker