If are an officer of a small company, you will generally be classified as an employee for purposes of paying income tax. This means your wages will be subject to income tax withholding.
But what if you receive a raise at the end of the year or a big bonus, based on the company’s strong performance? In this post, we will discuss the taxability of that additional money. It’s an issue that often occurs in “C” corporations in California.
If a dispute arises, your position might well be that the compensation you received – including the bonus or salary increase – was reasonable compensation based on your job duties. The IRS acknowledges that compensation that is commensurate with your job duties should be deductible by the business as a legitimate business expense.
But the IRS or California revenue authorities may assert that certain types or levels of pay are not reasonable compensation. In making this assertion, the tax authorities may be trying for double taxation. In other words, they may be trying to tax corporate earnings twice — first at the business level, and again at the individual level by taxing an executive officer’s year-end bump in pay.
This is why you need a skilled tax lawyer to offer counsel and focused action to assert your rights and interests. At our firm, we are experienced in showing that compensation of corporate officers was reasonable. We do this, for example, by using comparative data from your industry to show that your compensation was not excessive.