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This is unlike the C Corporation where shareholders are taxed only when they receive dividends. This provision becomes unethical since it subjects the shareholders to losses and denting of their other sources of income.
According to the Internal Revenue Service requirements, all the shareholders are required to make a salary. This implies that all the investors and shareholders are considered employees of the corporation alike, and therefore their wages are equally taxed (AllBusiness, 2012). If the investor offers services to the corporation, he will be additionally considered an employee to that capacity. This remuneration and taxation them becomes unfair since the investor expects returns in a larger scale than the other shareholders.
The solution of the above situation comes in with the distributions to share-holders-employees. It is worth noting that the distribution to shareholders must be included in the shareholders' taxable income during tax calculations. The exception comes in on the FICA tax since the distributions...
As an accountant this is where the equity will be struck as the investors will be allocated higher monies in the form of distributions rather wages. This is appropriate since the investor/employee wears two hats in this scenario; first as an investor then as a shareholder and employee (Tax Lawyers' Blog, 2009).
References
AllBusiness, (2012). The Pros and Cons of S Corporations. Retrieved July 24, 2012 from http://www.allbusiness.com/business-planning/business-structures-corporations/2516-1.html#axzz21bleXMFL
IRS, (2012). S Corporations. Retrieved July 24, 2012 from http://www.irs.gov/businesses/small/article/0,,id=98263,00.html
Tax Lawyers' Blog, (2009). S Corporation Wages and Distributions: Basic Tax Planning. Retrieved July 24, 2012 from http://www.pappasontaxes.com/index.php/2009/05/05/s-corporation-wages-and-distributions-basic-tax-planning/
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