Employees
As with other legal formats, a corporation must have each employee fill out Form I-9, Employment Eligibility and Identity Verification, Form W-4, Employee's Withholding Allowance Certificate and withhold income from each employee's salary based on the exemptions claimed. The corporation must also withhold the employee's part of FICA (Social Security), as well as pay the employer's share of FICA, FUTA, state unemployment taxes, and worker's compensation premiums. All these must be remitted at the appropriate times to the appropriate government agencies.
Small corporations normally employ shareholder-owners, which are typically the founders. One way to prevent double taxation is for the owners to pay themselves a salary which, if reasonable, can be used as a deductable expense to the corporation. Reasonable compensation is defined as an amount that would ordinarily be paid for similar services for similar corporations under
similar circumstances.
The IRS can disallow the deduction if the compensation is unreasonable as they view this as a tax avoidance scheme. At the same time, the recipient of the unreasonable income will still have to pay taxes on the full amount received.