“I’ll just take distributions, then pay myself reasonable compensation at the end of the year.” Quack, quack.
“Holding a meeting is a hassle. I’ll just write a check for my distribution when I do payroll.” Waddle, waddle.
Reasonable compensation is payment for the value of work performed by an S Corp shareholder/owner. Distributions are whatever the Board of Directors deems appropriate (votes on). These are two different events.
If you or your clients are tempted to put off paying reasonable compensation to the end of the year, or skip an actual meeting to vote on distributions, beware. The IRS believes that if it looks like a duck, walks like a duck and quacks like a duck – it is a duck. And some agents will assess payroll tax penalties and interest for late filing and late payment of the payroll taxes when compensation is not paid throughout the year. There is no reason to take this risk. Here’s what to do instead.