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The Effect of IRS Adjustments on Taxes Withheld and Paid

Is there some threshold for FICA calculations?

Joe is president and 75 percent owner of JS Corporation. He takes a salary of $825,000 this year. Presidents of comparable companies are generally paid no more than $500,000. What are the income and FICA tax consequences if $325,000 is determined to be excessive wages by the IRS? Assume Joe is in the 35 percent marginal tax bracket and JS Corporation is in the 34 percent marginal tax bracket.

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IRC Section 162(a)(1) states that "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including ... a reasonable allowance for salaries or other compensation for personal services actually rendered." Treas. Reg. 1.163-8 states that "The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payor, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such
payments correspond or bear a close ...

Solution Summary

Citing legal authority, this solution illustrates the effect of an IRS adjustment for excessive compensation on both the corporation and its shareholder-employer.