USA Director fee or salary?

[Adam Wascholl]

I have a client who is the major shareholder in a small C-Corp and he's interested in getting paid via a director fee rather than through payroll.

What do I need to consider with this? Is there a set of criteria I need to follow when deciding which is the best route to go? He wants to save on the payroll taxes, seeing as it's a business only a few months old, but I don't want him to be in trouble if it'll put the business out of compliance.

Thoughts?

 

[DTA93433]

If the major shareholder is performing personal services to the C-corp than a salary should be taken. If the payment is made as a dividend, it may later (under examination or audit by the Service) be re-characterized as salary - with additional taxes, interest and penalties owed by the shareholder and (perhaps) the C-corp.