Question

You are the tax accountant for Mr. Edwards who owns an S Corporation. He wants to reduce his salary by one-third in order to “save on taxes” and have more money to reinvest in his business. He works 50 plus hours a week to see his business succeed. Each year the business has increased its profits. This is mainly due to Mr. Edwards’ and his dedicated employees’ hard work and the large reinvestments he has made into the business. What considerations would you take into account when advising Mr. Edwards on his idea of reducing his salary? Are there any moral or ethical considerations in this situation?

Answer 1

Each year the business has increased its profit and Mr. Edward is working more than 50 hours a week (ideal is 48 hour a week) which is more than ideal timing thus the idea of reducing his salary is morally and ethically wrong. If he will be working for any other corporation, his salary might have increased on account of his dedicated work and increase in profit due to that.

Just to save the taxes, reducing the salary is a wrong idea. IRS uses several monitoring systems and analytics to determine if the owner of the S corporation is reducing his salary to save the taxes and if any one fails to comply with the test of reasonableness of the salary with the hour worked, IRS imposes fines and penalties.