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Incentives for S Corporations to

Underreport the Labor Income of Their

Owners

Paul Burnham (formerly of the Congressional Budget Office)

January 6, 2023

Abstract

Many, but not all, S corporations have an incentive to underreport the labor compensation of their

owners to help those owners minimize their payroll tax liability. This technical note accompanies a set of

tables that define two strategies S corporations might use to accomplish that. The note explains how the

two strategies work, how we identified the S corporations for which they are viable, and how we

estimated the extent to which the strategies are used. To estimate utilization, the tables compare

average compensation of owners of S corporations for whom a strategy is not viable with that of S

corporations for which the strategy is viable. The amount by which the latter is lower than the former is

a measure (albeit imperfect) of the extent to which the strategy is being used. Tables are disaggregated

either by industry or by categories defined by the number of owners and whether the income pool out

of which compensation would be paid is positive or negative.

_____________________________________________________________________________________

This research was conducted under the Internal Revenue Service’s Joint Statistical Research Program. All

data work for this project was done within the IRS computing environment. Results have been reviewed

to ensure that no confidential information is disclosed.

The author is grateful to James Pearce, Joseph Rosenberg and Lucas Goodman for helpful comments

and suggestions. This research has not been subject to the Congressional Budget Office’s regular review

and editing process. Views presented are those of the author and do not represent the views of the

Internal Revenue Service or the Congressional Budget Office.

Introduction and Background

Business owners typically contribute capital to the business in the expectation of receiving a return on

that capital (that is, capital income). The capital income of owners includes distributions of profits

(frequently in the form of dividends) and capital gains attributable to the company’s retained earnings

or other factors that create value. Owners may also contribute labor to the business, whether by

producing goods or services for sale or performing management functions. For that labor, they receive

compensation (or labor income), typically in the form of wages or a salary. Labor and capital income are

taxed differently from one another. Of particular interest in this note is the Federal Insurance

Contributions Act (FICA) tax—which is dedicated to the Social Security and Medicare Trust Funds. That

tax is intended to cover only labor income and applies to the wages and salaries of employees of all

firms and to the labor income of owners of corporate businesses.1 However, for some legal forms of

organization there may be incentives to underreport the labor income of their owners (effectively

recharacterizing it as capital income) to help the owners avoid the FICA tax.

This technical note focuses on one form of organization—the S corporation, so named because of the

subsection of the tax code in which it is defined. Many, but not all, S corporations have an incentive to

underreport the labor income of their owners to help them avoid the FICA tax. This note describes two

strategies for underreporting the labor income of owners and identifies the conditions under which each

of those strategies makes no owners of an S corporation worse off (hereafter referred to as a strategy’s

“viability”). It accompanies detailed tables that tabulate the number of S corporations for which each

strategy is viable and, as a rough measure of the extent to which a strategy is utilized, compares the

reported compensation paid by S corporations for which a strategy is viable with that paid by S

corporations for which it is not viable.

The S Corporation as an Organizational Form

The S corporation is one of several organizational forms that U.S. businesses can take. Unlike C

corporations, which are subject to the corporate income tax, the profits of S corporations are treated

like those of unincorporated businesses—that is, they are “passed through” to their owners (whether or

not they have been distributed) and taxed only through the individual income tax (see Table 1). Passive

S corporation owners (that is, those who do not materially participate in the business) whose income

exceeds certain thresholds must also pay a “net investment income tax” (NIIT) on their profits.2

Unlike other pass-through entities (but like C corporations), S corporations must pay their owners

“reasonable compensation” for services rendered before making any cash distribution of their profits.3

Employee contributions to certain retirement accounts, such as 401(k) plans, also represent labor income that is

included in the FICA tax base (although they are excluded from the individual income tax base). Owners of

partnerships and sole proprietorships are not subject to the FICA tax. Instead, they pay the Self-Employment

Contributions Act tax—also dedicated to the Social Security and Medicare Trust Funds. That tax applies to a

significant share of capital income as well as labor income and is beyond the scope of this note. For more detail,

see Congressional Budget Office, The Taxation of Capital and Labor Through the Self-Employment Tax (September

2012), www.cbo.gov/publication/4168.

The income thresholds are $200,000 for unmarried taxpayers and $250,000 for married taxpayers filing joint

returns. The rate of tax is 3.8 percent. Other sources of income subject to the tax include interest, dividends,

capital gains, royalties, and net rental income.

The IRS states that “[t]he amount of compensation will never exceed the amount received by the shareholder

either directly or indirectly.” (See “Wage Compensation for S Corporation Officers,” IRS Fact Sheet 2008-25, August

That compensation reduces the profits of the corporation that are subject to income taxes, but the

recipient must pay both income and FICA taxes on the amount. In 2022, an employee’s wages up to

$147,000 are taxed under FICA at a rate of 15.3 percent and amounts above that are taxed at 2.9

percent—all split equally between the employer and the employee.4 An additional Medicare tax of 0.9

percent (paid by the employee) is levied on wages in excess of the same income thresholds that apply to

the NIIT.

Not every corporation can qualify for S corporation status. A qualifying corporation must be a domestic

business entity and can have no more than 100 shareholders—none of which can be another for-profit

business or a nonresident alien. Only one class of stock is permitted and certain lines of business, mostly

in the finance industry, are ineligible.

Material Participation of Owners

The aforementioned material participation standard consists of a series of tests that are applied by each

owner when reporting their S corporation profits or losses on Schedule E of Form 1040. The most

important test is whether the owner contributed at least 500 hours of labor during the year. If so, then

their participation is deemed to be material and they report their profits and losses as “nonpassive.”

Other tests for material participation include contributing at least 100 hours of labor if no other owner

or employee contributed more or having been deemed a material participant in 5 of the last 10 years.

The final test is a “facts and circumstances” test that gives owners a great deal of leeway in classifying

themselves. In theory, owners who do not meet the material participation standard report their profit

and losses as “passive.”

Owners, however, frequently have an incentive to mischaracterize their level of activity and that

incentive can run in either direction. (This incentive is distinct from the incentive to mischaracterize

labor income as capital income, but it affects how precisely the mischaracterization of income can be

identified.) For example, the material participation standard is key to determining whether S

corporation profits are subject to the NIIT. At the same time, however, it is also key to determining

whether their profits can be offset by passive losses from another business. Those two factors set up

competing incentives—a desire to avoid the NIIT provides an incentive for high-income taxpayers to

report S corporation profits as “nonpassive,” but the presence of passive losses from other businesses

provides an incentive to report profits as “passive.”

For purposes of this note, it is important to recognize that many passive owners contribute no labor and

can legitimately report reasonable compensation of zero. In contrast, nonpassive owners, with few

exceptions, contribute labor. Therefore, their reasonable compensation should be positive. The

incentive of owners to mischaracterize their level of activity, however, interferes with any effort to

quantify the underreporting of labor income. Some self-described passive owners who receive no

2008, irs.gov/pub/irs-news/fs-08-25.pdf.) Thus, if no distribution of profits is made, no compensation need be paid

either. However, if an S corporation makes a cash distribution of profits, that distribution must be preceded by the

payment of reasonable compensation for services provided. If the distribution includes profits from prior years,

then it must be preceded by reasonable compensation for services provided in all of those years. Thus, although an

S corporation can report zero compensation of owners in years it does not make a cash distribution of profit, that

only defers the liability for FICA tax until the year the profits are distributed.

Tax revenues resulting from the 12.4 percent rate on wages up to the cap are dedicated to the Social Security

Trust Fund; those resulting from the 2.9 percent rate on all wages are dedicated to the Medicare Trust Fund.

compensation might, in fact, be material participants for whom compensation is being underreported.

Conversely, the absence of compensation reported by some self-described nonpassive owners might

actually reflect their lack of material participation.5

Incentives to Misreport Income

Subjecting the compensation of S corporation owners to FICA taxes creates an incentive for many S

corporations to report less as compensation and more as profits. Estimates of the impact of that

incentive vary widely. The Government Accountability Office estimated that S corporations

underreported the reasonable compensation of their owners by $23.6 billion in 2003 and 2004, which is

about 6 percent of their estimate of the correct amount.6 Another study covering that time period,

however, estimated that the amount reported by S corporations as “officers’ compensation” fell short of

the economic value of their owners’ labor between 2000 and 2004 by 35 percent.7 Estimates from a

more recent study implied that reported officers’ compensation fell short of the reasonable

compensation standard by 38 percent.8

The incentive is most straightforward for an S corporation with a single owner. Multi-owner S

corporations are more complicated. Such firms can benefit from underreporting owners’ compensation

using any number of strategies. Not all those strategies are available to every multi-owner firm,

however. Here, we focus on two strategies—the proportional-to-labor-contribution (LC) strategy, which

potentially results in owners receiving the highest combined after-tax incomes, and the proportional-toownership-shares (OS) strategy, which is available to the most firms.

Single-Owner Firms

For a single-owner S corporation, the amount reported as reasonable compensation has no impact on

the owner’s income tax liability because both the compensation and the profits (which have been

reduced by the amount of compensation) are taxed at the same rate. FICA tax liability, however,

depends on how the income is reported—amounts reported as compensation are subject to the FICA

The possible exceptions are strictly hypothetical because owners never explicitly identify themselves as passive or

nonpassive with respect to a particular S corporation or partnership. Instead, they aggregate the passive and

nonpassive income from all S corporations and partnerships and report those numbers separately on Schedule E.

As explained below, the practice of aggregating income over all S corporations and partnerships poses at least as

many challenges to identifying passive and nonpassive owners as does the incentive to mischaracterize activity

levels.

U.S. Government Accountability Office, “Actions Needed to Address Noncompliance with S Corporation Tax

Rules,” (December 2009), www.gao.gov/new.items/d10195.pdf.

Nicholas Bull and Paul Burnham, “Taxation of Capital and Labor: The Diverse Landscape by Entity Type,” National

Tax Journal, vol. 61, no. 3 (December 2008), p. 414, www.ntanet.org/NTJ/61/3/ntj-v61n03p397-419-taxationcapital-labor-diverse.html

See Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century,”

Quarterly Journal of Economics, vol. 134, no. 4 (November 2019), pp. 1675-1745, doi.org/10.1093/qje/qjz020.

They estimate that 2.2 percent of gross sales of S corporations can properly be characterized as labor income. That

equals 61 percent of reported officers’ compensation, implying that such compensation is underreported by 38

percent [0.61/(1+0.61)].

tax, but amounts reported as profits are not. Thus, to minimize FICA taxes, every sole-owner has an

incentive to reduce reported compensation and increase reported profits.9

Such a strategy can be successful because the meaning of “reasonable compensation” is somewhat

nebulous. In the context of nonprofit organizations, the IRS has defined it as “the value that would

ordinarily be paid for like services by like enterprises under like circumstances.”10 That definition is,

however, strictly conceptual—it does not carry the force of law. In fact, that definition is immediately

followed by “[r]easonableness is determined based on all the facts and circumstances.” That gives

taxpayers considerable latitude to favorably present their “facts and circumstances” to the IRS.

Multi-Owner Firms—the Proportional-to-Labor-Contribution (LC) Strategy

The LC strategy involves estimating each owner’s reasonable compensation for labor contributed and

reducing it by a fixed percentage. However, doing so and distributing the additional profit in proportion

to ownership shares does not always make every owner better off. Specifically, owners who contribute a

relatively high share of labor compared to their ownership share would be worse off under the LC

strategy than if the reasonable compensation standard had been followed, even though the strategy

would enable them avoid FICA taxes. That renders the strategy nonviable. When the LC strategy is

viable, however, the greatest benefit to owners is realized by reducing each owner’s compensation by

100 percent.

To illustrate a viable LC strategy, consider Mary and John who own an S corporation that earns $100,000

in a year, half of which is properly paid out in labor costs (direct compensation of owners and the

employer’s share of FICA taxes) and half of which is passed through to the owners as profits. Each owner

can dissolve the firm if dissatisfied with his or her share of the combined return on capital and labor. If

both Mary and John own 50 percent of the shares and contribute 50 percent of the labor, then both

Mary and John would be equally better off by reporting compensation of zero (Scenario 1—see the top

half of Table 2). By doing so, the combined after-tax income of the two owners would increase by

$6,218—with each owner receiving half of that amount ($3,109).

To illustrate nonviability, consider the case in which Mary owns 80 percent of the shares and receives a

corresponding share of the passed-through profits while John contributes 80 percent of the labor and is

compensated accordingly (Scenario 2—see the bottom half of Table 2 or Table 3a). When income is

properly reported, Mary’s after-tax income is $36,257 while John’s is $32,526. Claiming that reasonable

compensation was zero would increase their combined after-tax income from $68,783 to $75,000, but

one of the two owners would be worse off. John’s after-tax income would drop by more than half while

Mary’s would nearly double. It is impossible in these circumstances to misreport the nature of the

There are countervailing incentives that apply to certain owners, including sole-owners. For example, as owners

approach retirement age, they may find it advantageous to report compensation accurately because doing so

would maximize their future Social Security benefits. Those countervailing incentives are beyond the scope of this

note.

See www.irs.gov/charities-non-profits/exempt-organization-annual-reporting-requirements-meaning-ofreasonable-compensation. The IRS has not explicitly addressed the definition of reasonable compensation in the

context of for-profit corporations.

income without causing John’s after-tax income to decline. It would not be in John’s self-interest to

agree to the LC strategy.11

How great must the mismatch between labor contribution shares and ownership shares be before John

objects to the LC strategy? In the very special case in which each owner’s labor contribution share is

equal to one minus their ownership share, Mary’s ownership share could not exceed 54.52 percent

before John would object to employing the LC strategy (Scenario 3—see the right-most column of Table

3b), making the mismatch 9.04 percentage points (54.52 percent ownership share – 45.48 percent labor

contribution share). Moving beyond the special case depicted in Scenarios 1, 2, and 3 widens the

allowable mismatch somewhat. But even in the most extreme case in which Mary provides no labor

contribution at all, her ownership share could not exceed 16.58 percent before John would object to the

LC strategy (Scenario 4—see the right-most column of Table 3c).

Note that the above examples assume that the LC strategy is pursued to the fullest mathematically

possible extent. For actual taxpayers, however, it might be more rational to pursue the LC strategy less

aggressively. In many service industries, for example, reporting zero owners’ compensation seems

clearly inconsistent with the nature of the business, which might attract the attention of IRS auditors.

Hence, one might expect firms pursuing this strategy to select a percentage by which to reduce

compensation of less than 100 to avoid unwanted attention. Henceforth, firms will be classified with

reference to the LC strategy according to both viability and utilization as follows:

•

LC irrelevant—owners contribute no labor

LC full—owners contribute labor, the strategy is viable, and it appears to be fully utilized

(although that might represent deferral of tax liability rather than avoidance),

LC partial— owners contribute labor and the strategy is viable but not fully utilized, and

LC nonviable—owners contribute labor, but the strategy is not viable.12

Multi-Owner Firms—the Proportional-to-Ownership-Shares (OS) Strategy

The OS strategy involves reducing each owner’s compensation in proportion to ownership share.

Because the resulting profits will be also distributed according to ownership share, that means each

owner will recover the lost compensation plus the value of the FICA tax that was saved. The OS strategy

is more complicated to implement than the LC strategy, but it is available to many more S corporations.

In fact, every S corporation in which all owners contribute some labor can employ the strategy. The

strategy involves the following steps:

It would be possible for Mary to make a side payment to John of at least $17,526 that would make him whole

and therefore willing to go along with the strategy. The existence of such a payment, however, would constitute

evidence of intent to violate the legal requirement that owners be paid reasonable compensation for their labor.

We recognize that such side payments probably occur, but the evidence of such payments is inherently missing

from the tax data and so they cannot be accounted for in this analysis.

The fact that reasonable compensation need not be paid in every year—only in years in which cash distributions

of profits are made—implies that there should be a fifth classification of LC deferred, separate from the LC full

group. However, such behavior cannot be detected in the tax data, which does not distinguish between distributed

and undistributed profits. Thus, care must be taken in interpreting the share of S corporations that are classified as

LC full.

1. Divide each owner’s labor contribution share by their ownership share and identify the owner

with the lowest value (the reference owner). That value becomes the firmwide capital

adjustment factor. Note that if the reference owner’s labor contribution share is zero, the

capital adjustment factor will also be zero, which renders the strategy nonviable.

2. Multiply the capital adjustment factor by each owner’s ownership share.

3. For each owner, subtract the product in Step 2 from the labor contribution share to get the

optimal percentage of firm-wide reasonable compensation that should be paid to them under

the OS strategy.

4. Recalculate each owner’s after-tax income using the compensation calculated in Step 3.

The LC and OS strategies yield the same results under Scenario 1, but Scenario 2 provides a good

illustration of the implications of implementing the OS strategy. In that case, Step 1 yields laborcontribution-to-ownership-share ratios of 0.25 for Mary (0.20/0.80) and 4.00 for John (0.80/0.20),

making Mary the reference owner and 0.25 the firm’s capital adjustment factor. Multiplying the capital

adjustment factor by Mary’s and John’s ownership shares yields 0.20 for Mary (0.25 * 0.80) and 0.05 for

John (0.25 * 0.20). Subtracting those values from their labor contribution shares yields zero for Mary

(0.20 – 0.20) and 0.75 for John (0.80 – 0.05). The implications of that are that the OS strategy dictates

that Mary report zero compensation (a result that holds for every reference owner), which is $10,000

less than reasonable compensation for her labor contribution. John would report compensation of

$37,500, which is 75 percent of the firm-wide reasonable compensation amount of $50,000 and $2,500

less than reasonable compensation for his own labor contribution. For each owner, profits would

increase by the same amount that compensation (including the employer’s share of the FICA tax)

decreased. Ultimately, following the OS strategy would increase Mary’s after-tax income by $1,244 and

John’s by $311 (see Table 3a). In this case, the OS strategy would prevail because it is viable while the LC

strategy is not.

Under Scenario 3, in which John was indifferent under the LC strategy, $18,970 of John’s compensation

shifts to profits under the OS strategy, increasing his after-tax income by $2,359 (see Table 3b). Once

again, all of Mary’s compensation ($22,740) shifts to profits and her after-tax income increases by

$2,828. The OS strategy is, therefore, viable. The combined increase in after-tax income is less than

under the LC strategy by $1,031, but John is better off under the OS strategy. In the absence of side

payments, we have no way of determining whether John’s preference for the OS strategy or Mary’s

preference for the LC strategy would prevail.

Under Scenario 4, Mary starts out with no compensation, meaning that no compensation can be shifted

to profits. That renders the OS strategy nonviable, meaning that the LC strategy would prevail (see Table

3c).

Unlike the LC strategy, the OS strategy can be pursued to the fullest mathematically possible extent

without creating conditions that would easily attract the attention of IRS auditors. Thus, there are fewer

constraints to fully utilizing the OS strategy than there are to fully utilizing the LC strategy (although the

countervailing incentives mentioned in footnote 9 still apply). Henceforth, firms will be classified with

reference to the OS strategy according to both viability and utilization as follows:

•

OS full—viable and fully utilized,

OS partial—viable but not fully utilized, and

•

OS nonviable.

Ideal Generalized Tests for the Viability of Underreporting Strategies

The above examples are all limited to two-owner S corporations and are premised on knowing each

owner’s true contribution of labor. Retaining the latter premise, tests can be devised to determine

which underreporting strategies are viable for any given S corporation, regardless of the number of

owners. Determining which strategy would dominate when both are viable is more complicated and

beyond the scope of this note.

Testing for the viability of the OS strategy is simple—the strategy is viable for any S corporation in which

all owners contribute some labor. Testing for the viability of the LC strategy is more complicated. The

most straightforward test involves the following steps:

1. Calculate the after-tax income of each owner under a “compliant” scenario by applying the FICA

tax rate to reasonable compensation for the owner’s labor and the income tax rate to the sum

of compensation and profits.

2. Calculate the after-tax income of each owner under a “noncompliant” scenario by zeroing out

compensation (thus eliminating any FICA tax), redistributing the higher resulting profits in

proportion to ownerships shares, and applying the income tax rate to the new level of profits.

3. Compare the results of the “compliant” and “noncompliant” scenarios for each owner.

4. Recognize the LC strategy as viable only if every owner’s after-tax income is higher under the

“noncompliant” scenario.

Tests using less extreme noncompliance in Step 2 will give the same viability result if the ratio of

reported compensation to reasonable compensation is the same for all owners.

Tax data reflect what is reported by S corporations and their owners (that is, after income has been

mischaracterized), not the economic reality. Thus, it is not possible to know with certainty what each

owner’s reasonable compensation for labor services is. Nevertheless, certain inferences about viability

and utilization of underreporting strategies can be made using tax data.

Description of Data

To make the inferences and perform the quantitative tests described above, we drew a sample of Forms

1120S filed for tax year 2016, then attached all the needed supporting forms associated with the

selected S corporations. We then compared the information on the Forms 1120S with the cumulative

amounts from the associated Forms K-1 (the form S corporations must provide to each shareholder

reporting their share of profits or losses) and W-2. To the extent that those amounts differed, we

applied various techniques to reconcile them.

Drawing a Sample of S Corporations

Rather than simply draw a random sample of S corporations, we created 980 strata and drew a random

sample within each of them. The strata were defined using characteristics that we deemed most likely to

influence whether an S corporation would underreport the compensation of owners. We created the

strata using three criteria:

1. Presence or absence of net income on Form 1120S. We observed that firms with net income

were much more likely to report nonzero compensation of officers than firms without net

income. That is not necessarily dispositive because not all owners are officers and not all officers

are owners, but the overlap is very high, so that distinction was used as a stratification criterion

(See Appendix A for a discussion of the distinction between compensation of officers and

owners and the size of the overlap).

2. Number of owners. The difficulty of creating the conditions in which all owners benefit from

underreporting their compensation increases with the number of owners. Therefore, we used

number of owners as another stratification criterion and created five categories: one owner,

two owners, three owners, between four and seven owners, and eight or more owners.

3. Industry. The need for capital and labor contributions from owners varies by industry. Some

industries (for example, holding companies) are conducive to having a few owners managing the

business while the rest remain passive investors. Others (for example, group medical practices)

typically require significant labor contributions from all owners. To capture as much of that

diversity as possible, we recognized 98 separate industries.

We used two methods to determine the sample size in each stratum and generated a target sample size

by weighting the two methods. The first method was simple proportional representation, using a

constant sampling rate of 12 percent for each stratum. The second method was the Neyman Allocation

method, in which the target sample size in each stratum is a function of the coefficient of variation (that

is, the standard deviation divided by the mean) within that stratum. That method attempts to capture

more of the within-stratum variation than does proportional representation. However, it can result in

very small sample sizes in strata that are more homogeneous. The variable for which we calculated a

coefficient of variation was total receipts, which encompasses business receipts, gross rents, and

positive amounts of what is reported as “other income.”

To ensure an adequate sample size in each stratum, we gave proportional representation a weight of 0.4

and the Neyman Allocation method a weight of 0.6. That resulted in an overall sample size of 401,604,

which is about 8.5 percent of all S corporations. Among the different strata, the sampling rates ranged

from 1.1 percent (solo-practice dentists) to 100 percent (many strata, especially in the eight-or-moreowners category without net income). Sampling rates are summarized in Tables 4a and 4b.

From this sample, records whose tax year did not correspond to the calendar year (approximately 1

percent) were deleted as unusable. Because K-1s and W-2s are always issued on a calendar year basis, it

proved impractical to consistently identify the ones to attach to non-calendar-year firms.

Appending Additional Required Data

To each Form 1120S in the sample, we appended all the Schedules K-1 issued by the corporation and all

the Forms W-2 issued by the corporation to K-1 recipients. Before appending the W-2s, however, we

enhanced them by estimating the following information derived from the Form 1040 (and supporting

schedules) filed by the W-2 recipient:

•

The marginal income tax rate on wages and nonpassive S corporation profits,

The marginal income tax rate on passive S corporation profits,

The marginal FICA/SECA tax rate, and

The amount of passive partnership or S corporation income or loss.

The marginal income tax rates accounted for the regular income tax, the alternative minimum tax, the

net investment income tax, and the phaseouts of personal exemptions, itemized deductions, and child

credits. All of that was calculated using data from Form 1040 and its supporting schedules.13 Marginal

income tax rates of zero were assigned to owners who did not file a Form 1040.

Calculating the marginal FICA/SECA tax rate required accounting for all W-2s received by the K-1

recipient, including those from other employers. Furthermore, any Schedule SEs included with their

1040s also had to be accounted for. Only with all sources of compensation accounted for could we

determine whether the total exceeded $118,500—the threshold at which the tax rate dropped from

15.3 percent to 2.9 percent in 2016—or the threshold for the Additional Medicare Tax. That calculation

was done whether or not an owner filed a 1040.14

Reconciling Schedules K-1 with Form 1120S

For 88 percent of records in the sample, the K-1s were completely consistent with the information

reported on the 1120S (meaning that the number of K-1s matched the reported number of owners and

the “ordinary business income” distributed through the K-1s matched the ordinary business income on

the 1120S). In the remaining cases, the number of K-1s issued by the S corporation did not match the

number of owners reported on Form 1120S. In those cases, we attempted to reconcile the differences.

Not all such attempts were successful.

One circumstance that resisted reconciliation was when no K-1s were attached. The absence of K-1s

necessarily implied the absence of owners’ W-2s which made it impossible to determine whether an

incentive existed to underreport compensation of owners. Another such circumstance was when profits

were reported on Form 1120S, but losses were reported on the K-1s and vice versa. That condition

made it impossible to generate a reliable distribution of profits among owners to compare to the

distribution of compensation. Either circumstance (which combined represented less than 7 percent of

the nonmatches) resulted in the record being dropped from the sample.

In about 4 percent of nonmatches, the cumulative profits from the K-1s (cumprf) matched the profits

from the 1120S (repprf) even though the number of K-1s (nk1) did not match the number of owners

(nown). In those cases (and only those cases), we deemed the K-1s to be the more reliable source of

information and changed the value of nown to equal nk1.

In roughly 13 percent of nonmatches, deleting one or more K-1s resolved not only the differences

between nk1 and nown, but also the differences between cumprf and repprf. Most of those cases

involved multiple K-1s being issued to the same owner. When that happened, it generally was not

limited to one owner—it was more common for multiple K-1s to be issued to most or all owners (for

A nonzero amount of passive partnership or S corporation income or loss was used to identify owners to whom

the marginal tax rate on passive S corporation profits would apply. That introduces some imprecision because the

passive income could be attributable entirely to partnerships. Nevertheless, the source data do not distinguish

between partnership and S corporation income, so that imprecision is unavoidable.

The calculation for filers, however, required that Forms W-2 be reconciled to wages and salaries reported on

Form 1040. That required accounting for all W-2s of each owner’s spouse in addition to the owner’s W-2s.

Reconciliation was accomplished by identifying a set of W-2s that matched the amount reported on Form 1040

and deleting any W-2s outside of that set. If no such set could be identified, all W-2s were scaled up or down to hit

the proper total. In the few cases in which more than one Schedule SE was attributed to an owner, the second was

reattributed to the spouse. If the owner was not married, extra Schedules SE were disregarded.

example, to correct an error in the total amount distributed). Furthermore, it was usually the case that

ignoring all but the first K-1 of each owner resolved the differences. Ignoring all but the second K-1

worked about 20 percent of the time.

In less than 2 percent of nonmatches, deleting excess K-1s did not result in full reconciliation. In 30

percent of those cases, the remaining differences were deemed to render the record unusable and

those records were dropped. In the other 70 percent of cases, the records were retained because the

ordinary business income from the K-1s was deemed to provide a distribution of profits among owners

that could usefully be compared to the distribution of compensation despite the lack of reconciliation.

In most of the remaining nonmatches, nk1 fell short of nown and the absolute value of cumprf fell short

of absolute value of repprf. In those cases, additional K-1s were imputed, with the difference between

repprf and cumprf being distributed equally among them. In a handful of cases, nk1 fell short of nown,

but the absolute value of cumprf exceeded the absolute value of repprf. No imputation of profits was

made in such cases.

Because the compensation of owners tabulated from the W-2s (cumcomp) is a different concept than

compensation of officers reported on the 1120S (repcomp), we did not attempt a full reconciliation of

those differences (see Appendix A). However, when additional K-1s were imputed, we also imputed

additional W-2s if cumcomp was less than repcomp (roughly 25 percent of nonmatches).

Quantifying the Incentive to Underreport Compensation of Owners

After reconciling the Schedules K-1 to the Forms 1120S, we proceeded to test each S corporation in the

sample for conditions that would make either the LC or OS strategy viable. Tax data, however, reflect

what is reported by S corporations and their owners (that is, after any mischaracterization of income),

not the economic reality. It is not possible to know with certainty what each owner’s reasonable

compensation for labor services is. That being the case, the tests described above allow us only to

identify S corporations in the LC partial and OS partial categories. S corporations in the LC full category

report zero compensation and cannot be directly tested, and S corporations in the OS full category have

at least one owner with zero compensation and thus appear to fail the OS viability test.

Furthermore, within the OS partial category there is no way to distinguish between firms that took

partial advantage and firms that simply did not pursue the strategy. The same is true within the LC

partial category, and that category has additional complications. The LC strategy, by definition, reduces

each owner’s compensation by the same percentage, meaning that the mismatch between ownership

shares and labor contribution shares is not necessarily distorted for firms in the LC partial category.

However, if the OS strategy was employed (whether fully or partially), the reported distribution of

compensation will not reflect the underlying distribution of labor contribution. In such cases, some firms

that belong in the LC nonviable category will be placed in the LC partial category. To estimate the extent

to which the use of the OS strategy distorts the test for the viability of the LC strategy, we compare

results of the LC viability test for two groups:

1. All multi-owner S corporations (the I series in the accompanying tables)

2. S corporations in the OS nonviable group (the III series in the accompanying tables).

For consistency, we also compare results of the OS strategy tests for all multi-owner S corporations (the

II series in the accompanying tables) and S corporations in the LC nonviable group (also part of the III

series in the accompanying tables).

In this note, results are broken down along two dimensions; specifically, the number of owners and

whether the pool of net income out of which compensation would be paid is positive or negative. The

five categories for number of owners—one, two, three, between four and seven, and eight or more—

are the same as those used to create strata from which to draw the sample. The income pool is

calculated as follows:

Net business income as reported on Form 1120S

plus

any amounts deducted as compensation paid to owners

plus

net rental real estate income as reported on Form 8825

plus

other net rental income reported on Schedule K.

The concept of the income pool is the same as the $100,000 of earnings assumed in the illustrative

scenarios shown above. It is not the same as the “presence of net income” criterion used to define

strata from which to draw the sample. In that case, net income included only the first of the concepts

listed above.

The accompanying tables also provide breakdowns by industry for single-owner and multi-owners S

corporations.

Identifying and Comparing the LC Partial and LC Full Groups

The first step to identifying the LC partial group is to identify the preference of each owner. To do that,

we calculated a measure of each owner’s after-tax income under two scenarios:

1. The “as-reported” scenario, in which distributed profits and compensation subject to tax are as

reported on the owner’s K-1 and W-2 respectively (distinct from the “compliant” scenario

described above in that it may incorporate some degree of noncompliance with the reasonable

compensation standard), and

2. An “all-capital” scenario in which the total amount of owners’ compensation paid by the firm is

redistributed among owners in proportion to the reported distribution of profits and taxed

accordingly (essentially the same as the “noncompliant” scenario described above).

The formulas used to calculate the two measures of after-tax income (ATIrep for “as-reported” and

ATIcap for “all-capital”) are as follows:

1) 𝐴𝑇𝐼𝑟𝑒𝑝 = 𝐶𝑟𝑒𝑝 ∗ (1 − 𝑡𝑐 ) + 𝑊𝑟𝑒𝑝 ∗ (1 − 𝑡𝑤 − 0.5 ∗ 𝑡𝑓𝑖𝑐𝑎 )

2) 𝐴𝑇𝐼𝑐𝑎𝑝 = (𝐶𝑟𝑒𝑝 + 𝐶𝑟𝑒𝑑𝑖𝑠𝑡𝑟𝑖𝑏 ) ∗ (1 − 𝑡𝑐 )

where Crep is the reported amount of business and rental income or loss from Schedule K-1,

Credistrib is the amount of additional profits that would be distributed to the owner if no wages

and salaries were paid to any owner,

Wrep is the reported amount of wage and salary income subject the Medicare component of

FICA from Form W-2,

tc is the marginal income tax rate on passed-through profit or loss,

tw is the marginal income tax rate on wages and salaries, and

tfica is the marginal FICA tax rate on wages and salaries.15

Credistrib, in turn, is determined by the following formula:

𝑛𝑘1

3) 𝐶𝑟𝑒𝑑𝑖𝑠𝑡𝑟𝑖𝑏 = ∑𝑛𝑘1

𝑖=1 [𝑊𝑟𝑒𝑝,𝑖 ⁄(1 − 0.5 ∗ 𝑡𝑓𝑖𝑐𝑎 )] ∗ 𝐶𝑟𝑒𝑝 ⁄∑𝑖=1 𝐶𝑟𝑒𝑝,𝑖

Note that tc = tw if the owner was actively involved in the business or had no passive losses with which

to offset C. However, if the owner was not actively involved in the business and had passive losses from

other businesses that could be used to offset C, then tc = 0.

We then compared ATIrep with ATIcap for all owners. If ATIcap was greater than ATIrep for every owner,

we categorized the S corporation as LC partial.

As for the LC full group, it is likely that many (if not most) owners who classify themselves as passive are

not consciously pursuing an underreporting strategy—they believe that zero compensation is

reasonable. In theory, the passive/nonpassive classification of owners can provide an alternative

inferential test to identify firms in the LC full group.16 With few exceptions, S corporations with at least

one nonpassive owner cannot plausibly argue that zero represents reasonable compensation of its

owners. Therefore, we placed in the LC full group any S corporation in which all owners report zero

compensation and at least one is nonpassive.17 Other S corporations paying zero owners’ compensation

are placed in the LC irrelevant group.

Tax rates are always those observed on the return. If implementing the LC strategy bumps an owner into a

different tax bracket, that effect is not accounted for.

In practice, the incentives to misclassify interfere with that identification as does the way profits and losses are

reported on Schedule E and the way those data are captured in the Individual Returns Transaction File (IRTF), as

explained in Appendix B. The discussion of results uses designations derived from separate tests for passivity and

nonpassivity applied to each owner. In most cases, failing or passing one of the tests is sufficient to derive a

designation. In some cases, however, neither designation is supported by the available data, so the owner’s

activity level is labelled “ambiguous.” That label appears in the accompanying tables for the sake of transparency,

but care should be taken about using those results to draw conclusions about the incentives.

The exceptions suggest that this test probably overstates the size of the LS full group. For example, nonpassive

owners who are so designated solely because they met the hours-worked threshold in five of the last ten years

might legitimately receive no owners’ compensation in the current year. That would not reflect utilization of the LC

strategy, yet they would be placed in the LC full group. However, the data give no indication of the basis on which

owners designate themselves passive or nonpassive. Furthermore, the aforementioned possibility that the FICA tax

In the case of S corporations with a negative income pool, the size of the LC full group is less reflective of

the utilization of the LC strategy. Many such firms simply lack the cash to make compensation payments

and assume that they are therefore excused from the reasonable compensation standard. Because such

firms are very unlikely to make cash distributions of profits, they are, in fact, temporarily excused from

the standard. Nevertheless, because enforcement of the standard is only deferred, not abandoned, we

leave the classification as is.

Once S corporations have been placed in a group, we can compare the average compensation per

compensated owner in each of the groups to estimate the extent to which the LC strategy is being used.

The LC full group has average compensation of zero by definition, so comparisons to that group are not

very useful. However, if average compensation in the LC partial group is lower than in the LC nonviable

group, then we can conclude that the former group is probably making use of the LC strategy.

Relevance of the LC Strategy for S Corporations Paying Zero Owners’ Compensation

Just under half (48 percent) of all S corporations report zero owners’ compensation. According to the

criteria laid out above, whether that places an S corporation in the LC full group depends on whether

any of the owners are nonpassive. In the case of 7 percent of S corporations, all owners are passive and

receive zero compensation. The LC strategy is presumably irrelevant to them. Another 31 percent of S

corporations have nonpassive owners but nevertheless compensate none of them. Those are the S

corporations placed in the LC full group. Another 10 percent of S corporations do not compensate any of

their owners, but whether any of those owners are nonpassive cannot be determined, so they are

classified as “ambiguous.”

Those results differ most markedly based on whether the income pool is positive or negative. If it is

positive (three-quarters of S corporations—see Figure 1A), 35 percent do not compensate any of their

owners. If it is negative (one-quarter of S corporations—see Figure 1B), then 87 percent do not

compensate any of their owners. In both cases, the share in the LC irrelevant group declines with the

number of owners. Also in both cases, the share of S corporations for which the LC strategy is relevant

(the LC full group) is highest in the eight-or-more owners category and second highest in the singleowner category.

Viability of the LC Strategy for Multi-Owner S Corporations Paying Nonzero Owners’

Compensation

Of the 52 percent of S corporations that pay nonzero owners’ compensation, 75 percent fall into the LC

partial group and 25 percent fall into the LC nonviable group. However, those figures are distorted by

the inclusion in the denominator of single-owner S corporations, none of which fall into the latter group.

Considering only multi-owner S corporations paying nonzero owners’ compensation, 31 percent fall into

the LC partial group and 69 percent into the LC nonviable group.

About one-third of multi-owner S corporations with a positive income pool that compensate at least

some of their owners would fall into the LC partial group. Of those with a negative income pool, the

corresponding fraction is one-fifth. In both cases, that share declines sharply as the number of owners

increases (see Figures 2A and 2B). To illustrate the sharpness of the decline, consider the over 1.2

million two-owner S corporations, 21 percent of which pay compensation to their owner and therefore

liability of S corporation owners in this group is being permissibly deferred rather than avoided implies that the

size of this group overstates the use of the LC strategy.

would fall into the LC partial group. In contrast, of the nearly 34,000 S corporations with eight or more

owners, only about 2 percent (less than 700) would fall into that group.

Utilization of the LC Strategy by Multi-Owner S Corporations Paying Nonzero Owners’

Compensation

Comparing the average compensation of the LC partial group with that of the LC nonviable group

provides insight into the extent to which the strategy is actually used. Overall, owners in the LC

nonviable group receive, on average, around $88,200 of compensation. Those in the LC partial group, in

contrast, receive an average of $58,600—a gap of about 34 percent.

The dollar amounts are slightly higher and the gap roughly the same for multi-owner S corporations with

a positive income pool. For S corporations with a negative income pool, however, the dollar amounts

are roughly half of those with a positive income pool. The gap is smaller in both dollar terms ($14,700)

and percentage terms (30 percent).

The gap also varies by number of owners. Whether the income pool is positive or negative, the gap is

less than 5 percent for S corporations with two owners. When the income pool is positive, the gap

increases in percentage terms as the number of owners increases, reaching 37 percent in the eight-ormore owners category (see Figure 3A). However, because the number of S corporations in that category

that also fall into the LC partial group is so small, the total dollar amount associated with that gap is not

particularly large (less than $50 million). When the income pool is negative, the gap is negligible in all

but the eight-or-more category (see Figure 3B).

Identifying and Comparing the OS Partial and OS Full Categories

The OS partial group consists of all S corporations for which Wrep (reported wages) is greater than zero

for all owners. That definition is independent of any owner’s status as passive or nonpassive.

As explained above, S corporations that fall into the OS full group will always have at least one owner

reporting zero compensation. On the other hand, any S corporation in which an owner actually

contributes no labor will not benefit from the OS strategy. In this case, the passive/nonpassive

designation can be helpful.18 Because passive owners may legitimately contribute no labor, it is

important that no S corporation in which any passive owner reports zero compensation be included in

the OS full group. The uncompensated owner (or owners) who justifies placement in the OS full group,

therefore, must be nonpassive.19 If the uncompensated owners are passive, then the lack of

compensation is unlikely to be attributable to the OS strategy and the S corporation can be placed in the

OS nonviable group.20

The implications of viability and the extent of utilization can be tested by comparing average

compensation per compensated owner. One might hypothesize that the highest average compensation

The same caveats noted in footnote 16 apply here.

The same exceptions mentioned in footnote 17 apply here, meaning that this inferential test probably overstates

the size of the OS full group.

This inferential test unavoidably ignores the possibility that a passive owner may contribute labor—the data do

not report labor contribution, only compensation paid (or not paid, as the case may be). That being the case,

passive owners with zero compensation might actually be benefiting from the OS strategy. Thus, the size of the OS

nonviable group is probably overstated, and that overstatement would be at the expense of the OS full group,

offsetting some or all of the error mentioned in footnote 19.

would be observed in the OS nonviable group and the lowest average compensation would be observed

in the OS full group. It is not obvious, however, that the OS partial group will necessarily have lower

average compensation than the OS nonviable group. The inferential tests described above actually

provides no evidence that the OS partial group is using the strategy at all—only that it is viable for them

and that they could be using it more extensively. Furthermore, the strongest rationale for only partially

using the LC strategy (that is, avoiding the attention of IRS auditors) does not apply to the OS strategy.

Viability of the OS Strategy

As reported in connection with the LC strategy, 48 percent of S corporations pay zero owners’

compensation. The OS strategy is deemed viable for 49 percent, leaving only 3 percent of S corporations

in either the OS nonviable group or with ambiguous viability.

The viability numbers differ significantly based on whether the income pool is positive or negative. For

those with a positive income pool, the OS strategy is viable for 62 percent and not viable (or ambiguous)

for 4 percent. For those with a negative income pool, the strategy is viable for 11 percent and not viable

(or ambiguous) for 2 percent. In both cases, the remaining S corporations paid zero owners’

compensation.

The share of multi-owner S corporations for which the OS strategy is viable declines with the number of

owners, regardless of whether the income pool is positive or negative. For S corporations with a positive

income pool, the share for which the OS strategy is viable decreases from 64 percent in the two-owner

category to 13 percent in the eight-or-more-owners category (see Figure 4A). For multi-owner S

corporations with a negative income pool, the corresponding share decreases from 12 percent in the

two-owner category to 2 percent in the eight-or-more-owners category (see Figure 4B).

The impact of viability on average compensation per compensated owner is not clear. For multi-owner S

corporations with a positive income pool, the average compensation in the OC full group is 43 percent

less than in the OS nonviable group. However, that gap is not matched in any of the number-of-owner

categories (see Figure 5A). In the two- and three-owner categories, the gap is only between 10 and 15

percent and in the eight-or-more-owners category, the average compensation is higher in the OC full

group than in the OC nonviable group. Such a result indicates that the overall values for S corporations

are distorted by the distribution among number-of-owners categories. S corporations in the OS full

group have fewer owners than do S corporations in the OS nonviable group and average compensation

per compensated owner is strongly correlated with number of owners. That drives the overall average

for multi-owner S corporations down for the OS full group and up for the OS nonviable group, thereby

making the difference between the two appear larger than it really is. A similar pattern occurs for those

with a negative income pool (see Figure 5B).

Utilization of the OS Strategy by Multi-Owner S Corporations Paying Nonzero Owners’

Compensation

Among all S corporations for which the OS strategy is deemed viable, 10 percent fall into the OS full

group. However, that is distorted by the inclusion in the denominator of single-owner S corporations,

none of which fall into that group. Considering only multi-owner S corporations, the percentage in the

OS full group differs substantially based on whether the income pool is positive or negative. For those

with a positive income pool, 31 percent for whom the OS strategy is viable make full use of it. For those

with a negative income pool, the corresponding figure is 55 percent. In both cases, the share in the OS

full group varies by number of owners, but not in a systematic way.

Interpreting the extent of utilization is not straightforward. Whether the income pool is positive or

negative, the average compensation per compensated owner is lower in the OS full group (in which at

least one nonpassive owner has zero compensation), than in the OS partial group (in which all owners

receive compensation—see Figures 6A and 6B). However, in all but one of the number-of-owner

categories the average compensation in the latter group also exceeds that in the OS nonviable group (in

which at least one passive owner has zero compensation). That raises the possibility that the results

reflect a higher underlying labor contribution per contributing owner when all owners contribute labor

than when only some of them do, whether the noncontributors are passive or nonpassive. Note,

however, that this concern does not carry over to the above evaluation of the effect of viability. In that

case, both the OS full and OS nonviable groups have uncompensated owners and there is no reason to

expect differences that do not reflect the impact of the strategy’s viability.

Interaction Between the Two Strategies

Because it is possible for both the LC and OS strategies to be viable for a multi-owner S corporation, it is

necessary to determine whether the above results for each strategy might, to some extent, actually

reflect the impact of the other strategy. Also of concern is that use of the OS strategy distorts the

distribution of compensation relative to the distribution of labor contribution, rendering the test for LC

viability less reliable. To isolate each strategy, results have been generated for each combination of

viability and nonviability of the two strategies. However, doing so reduces the sample size enough that

the eight-or-more-owners category must be combined with the between-four-and-seven-owners

category to avoid disclosing tax return data.

The LC Strategy When the OS Strategy is Not Viable

Considering only S corporations in the OS nonviable group significantly ensures that only the effects of

the LC strategy are being captured, but it also reduces not only the number, but also the percentage of

returns in the LC partial group. Of those with a positive income pool, the LC partial group contains 32

percent of multi-owner S corporations reporting nonzero owners’ compensation. When considering only

the OS nonviable group, however, that share drops to 13 percent (see Figure 7A). Both figures are lower

when the income pool is negative (see Figure 7B).

Nevertheless, the question of interest is whether average compensation per compensated owner differs

between S corporations in the LC partial and LC nonviable groups. For all multi-owner S corporations

with a positive income pool, the former was 34 percent lower than the latter. Considering only S

corporations in the OS nonviable group, that gap increases to 56 percent. Among those with a negative

income pool, the change is even greater with the gap increasing from 30 percent to 64 percent. At the

very least, those results demonstrate that the gap observed for all S corporations is not an artifact of

interaction between strategies.

Breaking those results down by number of owners sheds additional light. Whether the income pool is

positive or negative, there was virtually no gap in average compensation between two-owner S

corporations in the LC partial and LC nonviable groups (see Figures 8A and 8B). That result does not

change when considering only S corporations in the OS nonviable group. The same phenomenon occurs

for three-owner S corporations with a negative income pool. For three-owner S corporations with a

positive income pool, there is an average compensation gap, but that difference is very similar whether

considering all S corporations or only those in the OS nonviable group. In the four-or-more-owners

category, however, the gap is significantly larger when considering only those in the OS nonviable group,

whether the income pool is positive or negative. That might indicate that the size of the gap is being

obscured by including those for which both strategies are viable, or it might be an artifact of a greatly

reduced sample size when only those in the OS nonviable group are considered.

The OS Strategy When the LC Strategy is Not Viable

Considering only S corporations in the LC nonviable group has very little effect on the results because

that group includes most multi-owner S corporations that report nonzero owners’ compensation.

Among two-owner S corporations (with a positive or negative income pool), dropping those for which

the LC strategy is viable puts a smaller percentage in the OS partial group and a larger percentage in the

OS full group (see Figures 9A and 9B).In the other number-of-owners categories, the changes associated

with narrowing the analysis are minor.

Comparisons between average compensation in the OS full group with those in the OS nonviable group

by number of owners are not significantly affected by dropping S corporations in the LC partial group

(see Figures 10A and 10B). Comparisons between S corporations in the OS full group and the OS partial

group show a slightly bigger difference after dropping S corporations in the LS partial group (see Figures

11A and 11B). Thus, the results reported above for the OS strategy do not seem to be overstated

because of interaction with the LC strategy.

Appendix A. The Relationship Between Compensation of Owners and

Compensation of Officers

Form 1120S draws a distinction between the compensation of corporate officers and the compensation

of nonofficers. The distinction is made to facilitate the enforcement of the reasonable compensation

standard. Unfortunately, because not all officers are owners (for example, an expert nonowner could be

hired to serve as chief financial officer) and not all owners are officers (in particular, passive investors),

that distinction is not useful for evaluating whether an S corporation has an incentive to underreport the

compensation of owners.21 For that, we need the actual compensation of owners, which we define as

compensation of K-1 recipients that is reported on a W-2.

Comparing the compensation received by K-1 recipients with the compensation of officers reported on

Form 1120S allows us to determine how closely the concepts overlap. For almost three-quarters of S

corporations, the two concepts are identical—43 percent report zero for both concepts and another 31

percent report the same positive amount for each. For another 18 percent of S corporations,

compensation of owners falls short of compensation of officers. For the remaining S corporations,

compensation of owners exceeds compensation of officers.

The relationship between the two concepts differs significantly between S corporations with positive

and negative income pools. Among those with a positive income pool, only 29 percent report zero for

both concepts while 39 percent report the same positive amounts. Of those with a negative income

pool, fully 83 percent of S corporations report zero for both concepts while only 7 percent report the

same positive amounts. For 21 percent of S corporations with a positive income pool, compensation of

owners falls short of compensation of officers; for those with a negative income pool, the corresponding

figure is 7 percent. For 11 percent of S corporations with a positive income pool, compensation of

owners exceeds compensation of officers; for those with a negative income pool, the corresponding

figure is 3 percent.

The percentage of S corporations reporting zero for both concepts does not vary systematically by

number of owners. Similarly, the percentage for which compensation of owners falls short of

compensation of officers shows little variation by number of owners. The percentage reporting the

same positive amount for both, however, declines as the number of owners increases. Of single-owner S

corporations with a positive income pool, 41 percent fall into that category compared to only 13 percent

of S corporations with 8 or more owners (see Figure A-1A). The percentage in which compensation of

owners exceeds compensation of officers shows the opposite pattern. Only 9 percent of single-owners S

corporations fall into that category, compared to 32 percent of S corporations with eight or more

owners. Those general patterns hold—at much lower levels—for S corporations with a negative income

pool (see Figure A-1B).

Additional data can be found in the tables accompanying this note (each with an IV prefix). For example,

the tables present the average amount of compensation deducted by S corporations when

compensation of officers equals compensation of owners and when each exceeds the other.

Furthermore, compensation paid when the two are not equal is broken down into the overlap, the

There is no incentive to underreport the compensation of nonowner officers. They would not receive any of the

increased distribution of profits and would therefore insist on receiving full compensation subject to the FICA tax.

excess of owners’ over officers’ compensation, and the excess of officers’ over owners’ compensation.

The tables disaggregate the data as follows:

A. By the sign of the income pool (positive or negative) and number-of-owners class (one, two,

three, between four and seven, and eight or more), and

B. By industry.

Appendix B. Identifying the Activity Level of Owners

There are no data fields from Schedule K-1, Form 1040, or its accompanying schedules that allow for the

definitive classification of S corporation owners as either passive or nonpassive, even if those owners

engage in no mischaracterization of their activity level. The only data that addresses the distinction at all

are the following fields from Schedule E relating to partnership and S corporation income:

1. Passive partnership and S corporation income

2. Nonpassive partnership and S corporation income

3. Passive partnership and S corporation losses

4. Nonpassive partnership and S corporation losses

Thus, even though the database links those four fields to the K-1s of each S corporation owner, the

fields cannot be definitive because they do not distinguish between partnership and S corporation

income. Even if the fields were limited to S corporations, they might cover S corporations other than the

one issuing the K-1.

Nevertheless, we devised rules for comparing Schedule E income with K-1 income that allow the

distinction to be made for over 85 percent of owners’ compensation. The process tests for passivity and

nonpassivity separately, then makes an assignment based on the outcome of both tests. The tests below

apply to nonpassive and passive income, but a parallel set of rules applies to passive and nonpassive

losses:

Nonpassivity test

• Nonpassive Schedule E income = 0

• 0 < Nonpassive Schedule E income < K-1 income

• Nonpassive Schedule E income = K-1 income

• Nonpassive Schedule E income > K-1 income

Strongly fails

Weakly fails

Strongly passes

Inconclusive

Passivity test

• Passive Schedule E income = 0

• 0 < Passive Schedule E income < K-1 income

• Passive Schedule E income = K-1 income

• Passive Schedule E income > K-1 income

Strongly fails

Weakly fails

Strongly passes

Inconclusive

Evaluating the two tests on each owner together yields the following assignments:

Result of nonpassivity test

Strongly pass

Weakly fail

Inconclusive

Strongly fail

Weakly fail

Inconclusive

Strongly fail

Weakly fail

Strongly fail

Weakly fail

Strongly pass

Inconclusive

Result of passivity test

Strongly fail

Weakly fail

Inconclusive

Strongly fail

Weakly fail

Strongly pass

Weakly fail

Inconclusive

Strongly fail

Weakly fail

Strongly pass

Inconclusive

Assignment

Nonpassive

Passive

See below

Ambiguous

Most of the above assignments should be uncontroversial. Results of “strongly pass” or “strongly fail”

are definitive unless they are in direct contradiction to one another (the double “strongly fail” case is

discussed below). Those involving the “weakly fail” outcome, however, require some illustration.

Consider an owner with $10,000 of K-1 income and $5,000 of nonpassive Schedule E income. That

owner weakly fails the nonpassivity test because there is not enough nonpassive Schedule E income to

account for the entire K-1 amount. The assignment then depends on the amount of passive Schedule E

income. If that amount is zero, then the only Schedule E income is nonpassive and, despite that

income’s insufficiency, it seems reasonable to make the “nonpassive” assignment. If, however, passive

Schedule E income was also $5,000, it would weakly fail both tests, there would be no basis for

distinguishing between them, and the assignment would be “ambiguous.” If passive Schedule E income

were $10,000 (the same as the K-1 amount), then the owner would strongly pass the passivity test and

the assignment clearly would be “passive.” Finally, if passive Schedule E income were in excess of

$10,000, the result of the passivity test would be inconclusive because there is clearly passive income

from other entities being included. Nevertheless, the assignment would be “passive” because there is

enough passive Schedule E income to account for the entire K-1 amount, while the same is not true of

nonpassive Schedule E income.

A result of “strongly fail” for both tests occurs when there is no income of either type reported on

Schedule E. That can occur under four broad conditions:

1. The owner is noncompliant and is not reporting the S corporation income despite the existence

of a K-1;

2. The owner is a legitimate individual nonfiler;

3. The owner is a compliant individual filer, but there is some bureaucratic reason why Schedule E

is not showing up in the IRTF; or

4. The owner is a nonprofit organization.

Of those conditions, the last is not actually ambiguous—those owners are unambiguously passive. We

identify them by the absence of both a 1040 and a W-2. That necessarily includes some S corporation

owners meeting the other three conditions (probably all who meet the second condition), but the

misidentified number should be small. Of the rest, simply removing from the analysis owners who are

noncompliant or associated with bureaucratic errors would seem to be the preferred solution. However,

there is no way to do so without invalidating the tests for the viability of the LC and OS strategies, so

those owners are retained with the “ambiguous” label.

Overall, around 68 percent of owners were designated as nonpassive and 8 percent as passive, with 19

percent left as ambiguous. The remaining 5 percent were deemed to be nonprofit organizations or

individual nonfilers. The ambiguous share generally increases with the number of owners and is higher

for S corporations with a negative income pool (see Figures B-1A and B-1B).

The tables accompanying this note include the following three (each beginning with V) that present data

by activity by level (nonpassive, passive, ambiguous, and nonprofit):

Percentage of S corporations and average owner’s S corporation income from Schedule K-1

(which excludes labor income),

ii) Percentage of owners receiving labor compensation on Form W-2 and average compensation

per compensated owner,

iii) Percentage of owners receiving each type of S corporation and partnership income or loss

(excluding labor) reported on Schedule E (nonpassive income, nonpassive loss, passive income,

passive loss).

Each of those tables disaggregates the data as follows:

A. By the sign of the income pool (positive or negative) and number-of-owners class (one, two,

three, between four and seven, and eight or more), and

B. By industry.

Tables

Table 1.

The Taxation of Different Forms of Business Organization

Direct Taxation of Profits

C corporations

S corporations

Limited Liability

Companies

Limited

Partnerships

General

Partnerships

Sole

Proprietorships

Corporate income taxb

Individual income tax

Individual income tax and

(for some members) SECAd,e

Individual income tax and

(for some partners) SECAd,f

Individual income tax and

SECAd,f

Individual income tax and

SECAd

Taxation of

Owners’

Compensationa

FICAc

SECAd

Notes:

Net investment income tax liability is not covered in this table.

All owners’ compensation is subject to individual income tax in addition to the Social Security taxes

shown.

C Corporation profits are also subject to indirect taxation through the individual income tax on dividends

and realized capital gains.

FICA = Federal Insurance Contributions Act

SECA = Self-Employment Contributions Act

Members of limited liability companies who actively participate in the business must pay SECA tax on

their distributive share of profits.

Partners who do not receive full liability protection must pay SECA tax on their distributive share of

profits.

Table 2.

Illustration of the Proportional-to-Labor-Contribution Strategy for Increasing After-Tax Income

(Dollars)

Proper Characterization

of Income

Mary

John

Proportional-to-LaborContribution Strategy

Mary

John

Scenario 1: Owners’ Labor Contribution Shares

Are the Same as Their Ownership Shares

Pre-tax income

…from wages (owners’ compensation)

…employer’s share of FICA

…from passed-through profits

Total pre-tax income

23,223

1,777

25,000

50,000

23,223

1,777

25,000

50,000

Individual income tax

…on wages

…on passed-through profits

FICA tax (employer & employee shares)

Total tax liability

5,806

6,250

3,553

15,609

5,806

6,250

3,553

15,609

12,500

34,391

37,500

3,109

37,500

3,109

After-tax income

Benefit of mischaracterizing

Scenario 2: Owners’ Labor Contribution Shares

Differ Significantly from Their Ownership Shares

Labor contribution shares

Ownership shares

0.20

0.80

0.20

Pre-tax income

…from wages (officers’ compensation)

…employer’s share of FICA

…from passed-through profits

Total pre-tax income

9,289

711

40,000

50,000

37,157

2,843

10,000

50,000

80,000

20,000

Individual income tax

…on wages

…on passed-through profits

FICA tax (employer & employee shares)

Total tax liability

2,322

10,000

1,421

13,744

9,289

2,500

5,685

17,474

20,000

5,000

60,000

23,744

15,000

-17,526

After-tax income

36,256

32,526

Benefit of mischaracterizing

Notes: Assumes a 25 percent income tax rate and no other income or deductions.

FICA = Federal Insurance Contributions Act

Numbers may not sum to totals because of rounding.

Source: Author’s calculations

Table 3a.

Two Different Strategies for Increasing After-Tax Income—Scenario 2

(Dollars)

Proper Characterization of

Income

Mary

John

Labor contribution shares

Ownership shares

Proportional-to-OwnershipShares Strategy

Mary

John

Proportional-to-LaborContribution Strategy

Mary

John

0.20

0.80

0.20

Pre-tax income

…from wages (owners’ compensation)

…employer’s share of FICA

…from passed-through profits

Total pre-tax income

9,289

711

40,000

50,000

37,157

2,843

10,000

50,000

34,835

2,665

12,500

50,000

80,000

80.000

20,000

Individual income tax

…on wages

…on passed-through profits

FICA tax (employer & employee shares)

Total tax liability

2,322

10,000

1,421

13,744

9,289

2,500

5,685

17,474

12,500

8,709

3,125

5,330

17,164

20,000

15,308

5.000

14,356

After-tax income

36,256

32,526

Benefit of mischaracterizing

Assumes a 25 percent income tax rate and no other income or deductions.

FICA = Federal Insurance Contributions Act

Numbers may not sum to totals because of rounding.

Source: Author’s calculations

37,500

1,244

32,836

311

60.000

23,744

15,000

-17,526

Table 3b.

Two Different Strategies for Increasing After-Tax Income—Scenario 3

(Dollars)

Proper Characterization of

Income

Mary

John

Proportional-to-OwnershipShares Strategy

Mary

John

Proportional-to-LaborContribution Strategy

Mary

John

Labor contribution shares

Ownership shares

0.4548

0.5452

0.4548

Pre-tax income

…from wages (owners’ compensation)

…employer’s share of FICA

…from passed-through profits

Total pre-tax income

21,124

1,616

27,260

50,000

25,323

1,937

22,740

50,000

7,701

589

41,709

50,000

54,520

45,480

Individual income tax

…on wages

…on passed-through profits

FICA tax (employer & employee shares)

Total tax liability

5,281

6,815

3,232

15,328

6,331

5,685

3,874

15,890

12,500

1,925

10,427

1,178

13,531

11,630

11,370

After-tax income

34,672

34,110

Benefit of mischaracterizing

Assumes a 25 percent income tax rate and no other income or deductions.

FICA = Federal Insurance Contributions Act

Numbers may not sum to totals because of rounding.

Source: Author’s calculations

37,500

2,828

36469

2,359

40,890

6,218

34,110

Table 3c.

Two Different Strategies for Increasing After-Tax Income—Scenario 4

(Dollars)

Proper Characterization of

Income

Mary

John

Labor contribution shares

Ownership shares

0.0000

0.1658

Proportional-to-OwnershipShares Strategy

Mary

John

Proportional-to-LaborContribution Strategy

Mary

John

1.0000

0.8342

Pre-tax income

…from wages (owners’ compensation)

…employer’s share of FICA

…from passed-through profits

Total pre-tax income

8,290

46,447

3,553

41,710

91,710

8,290

46,447

3,553

41,710

91,710

16,580

83,420

Individual income tax

…on wages

…on passed-through profits

FICA tax (employer & employee shares)

Total tax liability

2,073

11,612

10,428

7,106

29,146

2,073

11,612

10,428

7,106

29,146

4,145

20,855

After-tax income

6,218

62,564

Benefit of mischaracterizing

Assumes a 25 percent income tax rate and no other income or deductions.

FICA = Federal Insurance Contributions Act

Numbers may not sum to totals because of rounding.

Source: Author’s calculations

6,218

62,564

12,435

6,218

62,565

Table 4a: Average Sampling Rates by Industry (Percent)

Agriculture: Crop Farming

Agriculture: Livestock

Agriculture: Forestry

Agriculture: Fishing & Hunting

Agriculture: Support Activities

Mining: Oil and Gas Extraction

Mining: All Other Extraction

Mining: Support Activities

Utilities

Construction: Buildings

Construction: Heavy

Construction: Specialty

Manufacturing: Food

Manufacturing: Beverage & Tobacco

Manufacturing: Textile Mills

Manufacturing: Apparel

Manufacturing: Leather Products

Manufacturing: Wood Products

Manufacturing: Paper

Manufacturing: Printing

Manufacturing: Petroleum Products

Manufacturing: Chemicals

Manufacturing: Plastic & Rubber

Manufacturing: Nonmetallic Minerals

Manufacturing: Primary Metals

Manufacturing: Fabricated Metals

Manufacturing: Machinery

Manufacturing: Computers & Electronics

Manufacturing: Electrical Equipment

Manufacturing: Transportation Equipment

Manufacturing: Furniture

Manufacturing: Miscellaneous

Wholesale Trade: Durables

Wholesale Trade: Nondurables

Wholesale Trade: Other

Retail Trade: Motor Vehicles

Retail Trade: Home Furnishings

Retail Trade: Electronics & Appliances

Retail Trade: Home & Garden Improvement

Retail Trade: Food & Beverage

Retail Trade: Personal Care

Retail Trade: Gasoline

Retail Trade: Clothing

Retail Trade: Recreational

Retail Trade: General Merchandise

Retail Trade: Other Stores

Retail Trade: Nonstore

Transportation: Air

Transportation: Rail

13.1

28.5

23.2

22.8

16.8

21.8

44.0

22.3

49.5

4.5

15.8

2.3

30.3

45.0

57.3

25.4

62.8

19.3

63.7

16.1

66.2

31.2

31.8

29.6

41.6

10.1

17.2

35.0

34.0

36.1

25.7

14.3

6.7

11.1

16.0

6.3

14.3

20.0

11.2

8.8

11.1

11.9

12.4

14.7

18.1

8.4

9.1

35.4

90.8

Source: Internal Revenue Service

Transportation: Water

Transportation: Truck

Transportation: Passenger

Transportation: Pipeline

Transportation: Support Activities

Transportation: Warehousing & Storage

Information: Publishing

Information: Movies & Records

Information: Broadcasting

Information: Telecommunications

Information: Internet Services

Information: Other

Finance: Depository Credit Intermediation

Finance: Nondepository Credit Intermediation

Finance: Securities & Commodities

Finance: Insurance

Finance: Funds, Trusts & Other

Real Estate: Lessors of Buildings

Real Estate: Agents & Brokers

Real Estate: Property Managers

Real Estate: Non-Real Estate Rental

Real Estate: Lessors of Intangibles

Services: Legal

Services: Accounting

Services: Architectural & Engineering

Services: Specialized Design

Services: Computer Systems Design

Services: Management Consulting

Services: Scientific

Services: Advertising & Marketing

Services: Other Professional

Holding Companies

Services: Administrative & Support

Services: Waste Management

Services: Educational

Services: Physicians

Services: Dentists

Services: Other Health Practitioners

Services: Other Ambulatory Health

Services: Hospitals & Nursing Homes

Services: Social

Services: Arts & Sports

Services: Artists, Writers & Performers

Services: Amusement & Gambling

Services: Accommodation

Services: Food & Drink

Services: Repair

Services: Personal

Services: Nonprofit

All Industries

49.8

5.8

12.5

99.7

9.7

35.8

24.6

15.5

37.2

24.0

24.2

26.7

59.6

22.5

16.9

6.2

36.7

5.5

4.6

6.4

17.8

57.4

3.7

7.4

8.6

8.5

6.7

8.8

10.0

13.2

10.8

29.6

6.1

24.2

11.5

3.0

2.5

4.8

11.2

22.5

9.3

20.4

8.9

10.7

11.2

3.4

3.2

3.3

36.9

8.5

Table 4b:

Average Sampling Rates by Profitability and Number of Owners

(Percent)

With Net Income

One owner

5.3

Two owners

7.0

Three owners

19.0

Four to seven owners

23.1

Eight or more owners

51.1

All classes

7.1

Source: Internal Revenue Service

Without Net Income

8.0

10.9

24.8

28.5

52.3

11.1

FIGURE 1A

R E L E VANCE OF THE LC STR ATEGY TO S COR POR ATIONS WITH

A POS ITIVE INCOME POOL BU T PAYING Z E RO OWNE RS '

COMPE NSATION, BY NU MBE R OF OWNE RS

ONE OWNER

TWO OWNERS

THREE OWNERS

11%

BETWEEN FOUR AND

SEVEN OWNERS

12%

EIGHT OR MORE

OWNERS

LC relevance is ambiguous

"LC irrelevant" group

"LC full" group

26%

21%

18%

21%

31%

FIGURE 1B

R E L E VANCE OF THE LC STR ATEGY TO S COR POR ATIONS WITH

A NEGATIVE INCOME POOL BU T PAYING Z E RO OWNE RS '

COMPE NSATION, BY NU MBE R OF OWNE RS

"LC irrelevant" group

ONE OWNER

THREE OWNERS

BETWEEN FOUR AND

SEVEN OWNERS

15%

TWO OWNERS

EIGHT OR MORE

OWNERS

LC relevance is ambiguous

LC relevant (includes "LC full" group)

21%

53%

28%

53%

41%

40%

38%

44%

18%

63%

FIGURE 2A

VIABIL ITY AND U TIL IZATION OF THE LC STR ATEGY FOR

S COR POR ATIONS WITH A POS ITIVE INCOME POOL ,

BY NU MBE R OF OWNE RS

"LC full" group

ONE OWNER

"LC partial" group

26%

63%

TWO OWNERS

21%

THREE OWNERS

18%

12%

BETWEEN FOUR AND

SEVEN OWNERS

21%

27%

43%

56%

59%

EIGHT OR MORE

OWNERS

"LC nonviable" group

31%

58%

FIGURE 2B

VIABIL ITY AND U TIL IZATION OF THE LC STR ATEGY FOR

S COR POR ATIONS WITH A NEGATIVE INCOME POOL ,

BY NU MBE R OF OWNE RS

Zero compensation (includes "LC full" group)

TWO OWNERS

53%

BETWEEN FOUR AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

11%

40%

44%

63%

10%

15%

THREE OWNERS

"LC nonviable" group

16%

53%

ONE OWNER

"LC partial" group

19%

FIGURE 3A

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR

S COR POR ATIONS WITH A POS ITIVE INCOME POOL ,

BY LC STR ATEGY VIABIL ITY AND NU MBE R OF OWNE RS

"LC nonviable" group

ONE OWNER

TWO OWNERS

THREE OWNERS

152,900

135,700

92,200

107,200

82,100

66,800

64,200

76,100

241,000

"LC partial" group

BETWEEN FOUR

AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

FIGURE 3B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR

S COR POR ATIONS WITH A NEGATIVE INCOME POOL ,

BY LC STR ATEGY VIABIL ITY AND NU MBE R OF OWNE RS

"LC nonviable" group

ONE OWNER

TWO OWNERS

9,700

61,200

62,700

52,800

50,100

32,300

32,000

32,100

112,900

"LC partial" group

THREE OWNERS

BETWEEN FOUR

AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

FIGURE 4A

VIABIL ITY AND U TIL IZATION OF THE OS STR ATEGY FOR

S COR POR ATIONS WITH A POS ITIVE INCOME POOL AND

PAYING NONZ E RO OWNE RS ' COMPE NSATION, BY NU MBE R OF

OWNE RS

"OS partial" group

ONE OWNER

"OS nonviable" group

63%

TWO OWNERS

18%

THREE OWNERS

18%

BETWEEN FOUR AND

SEVEN OWNERS

15%

EIGHT OR MORE

OWNERS

OS viability is ambiguous

"OS full" group

46%

34%

20%

13%

10%

16%

38%

FIGURE 4B

VIABIL ITY AND U TIL IZATION OF THE OS STR ATEGY FOR

S COR POR ATIONS WITH A NEGATIVE INCOME POOL AND

PAYING NONZ E RO OWNE RS ' COMPE NSATION, BY NU MBE R OF

OWNE RS

"OS partial" group

ONE OWNER

11%

THREE OWNERS

7% 4% 4%

EIGHT OR MORE

OWNERS

BETWEEN FOUR AND

SEVEN OWNERS

TWO OWNERS

OS viability is ambiguous

"OS full" group

6% 5%

14%

"OS nonviable" group

FIGURE 5A

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR

S COR POR ATIONS WITH A POS ITIVE INCOME POOL ,

BY OS STR ATEGY VIABIL ITY AND NU MBE R OF OWNE RS

TWO OWNERS

THREE OWNERS

119,800

118,300

92,800

83,300

63,300

54,900

ONE OWNER

197,900

"OS nonviable" group

228,900

"OS full" group

BETWEEN FOUR

AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

FIGURE 5B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR

S COR POR ATIONS WITH A NEGATIVE INCOME POOL ,

BY OS STR ATEGY VIABIL ITY AND NU MBE R OF OWNE RS

TWO OWNERS

THREE OWNERS

56,400

55,900

60,700

39,400

22,600

26,900

ONE OWNER

BETWEEN FOUR

AND

SEVEN OWNERS

98,700

"OS nonviable" group

135,600

"OS full" group

EIGHT OR MORE

OWNERS

FIGURE 6A

"OS partial" group

ONE OWNER

TWO OWNERS

THREE OWNERS

145,700

118,300

109,600

83,300

68,000

54,900

76,100

228,900

"OS full" group

319,300

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL AND A

VIABL E OS STR ATEGY, BY DEGR E E OF U TIL IZATION AND

NU MBE R OF OWNE RS

BETWEEN FOUR

AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

FIGURE 6B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL AND A

VIABL E OS STR ATEGY, BY DEGR E E OF U TIL IZATION AND

NU MBE R OF OWNE RS

TWO OWNERS

THREE OWNERS

70,600

55,900

66,500

39,400

35,500

26,900

32,100

ONE OWNER

BETWEEN FOUR

AND

SEVEN OWNERS

84,000

"OS partial" group

135,600

"OS full" group

EIGHT OR MORE

OWNERS

FIGURE 7A

LC STR ATEGY VIABIL ITY FOR S COR POR ATIONS WITH A

POS ITIVE INCOME POOL AND PAYING NONZ E RO OWNE RS '

COMPE NSATION, BY NU MBE R OF OWNE RS AND INTE R AC TION

WITH THE OS STR ATEGY

"LC partial" group

"LC nonviable" group

"OS NONVIABLE"

GROUP ONLY

TWO OWNERS

25%

75%

THREE OWNERS

91%

FOUR OR MORE

OWNERS

91%

ALL MULTI-OWNER

S CORPORATIONS

TWO EARNERS

39%

THREE OWNERS

FOUR OR MORE

OWNERS

61%

18%

82%

93%

FIGURE 7B

LC STR ATEGY VIABIL ITY FOR S COR POR ATIONS WITH A

NEGATIVE INCOME POOL AND PAYING NONZ E RO OWNE RS '

COMPE NSATION, BY NU MBE R OF OWNE RS AND INTE R AC TION

WITH THE OS STR ATEGY

"LC partial" group

"LC nonviable" group

"OS NONVIABLE"

GROUP ONLY

TWO OWNERS

80%

20%

THREE OWNERS

93%

FOUR OR MORE

OWNERS

95%

ALL MULTI-OWNER

S CORPORATIONS

TWO EARNERS

THREE OWNERS

FOUR OR MORE

OWNERS

71%

29%

88%

12%

94%

FIGURE 8A

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL , BY

NU MBE R OF OWNE RS AND INTE R AC TION WITH THE OS

STR ATEGY

179,700

"LC nonviable" group

"OS

NONVIABLE"

GROUP ONLY

TWO OWNERS

THREE OWNERS FOUR OR MORE

OWNERS

105,900

107,200

82,100

66,800

49,900

64,200

95,700

70,500

63,200

63,700

166,100

"LC partial" group

ALL MULTITWO EARNERS THREE OWNERS FOUR OR MORE

OWNER S

OWNERS

CORPORATIONS

FIGURE 8B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL , BY

NU MBE R OF OWNE RS AND INTE R AC TION WITH THE OS

STR ATEGY

"OS

NONVIABLE"

GROUP ONLY

TWO OWNERS

THREE OWNERS FOUR OR MORE

OWNERS

40,800

52,800

50,100

32,300

32,000

60,700

82,300

84,700

"LC nonviable" group

21,900

22,700

21,600

61,000

"LC partial" group

ALL MULTITWO EARNERS THREE OWNERS FOUR OR MORE

OWNER S

OWNERS

CORPORATIONS

FIGURE 9A

VIABIL ITY AND U TIL IZATION OF THE OS STR ATEGY FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL AND

PAYING NONZ E RO OWNE RS ' COMPE NSATION, BY NU MBE R OF

OWNE RS AND INTE R AC TION WITH THE LC STR ATEGY

"OS full" group

"OS partial" group

OS viability is ambiguous

"OS nonviable" group

"LC NONVIABLE"

GROUP ONLY

TWO OWNERS

THREE OWNERS

FOUR OR MORE

OWNERS

41%

49%

30%

5% 5%

44%

22%

26%

13%

21%

12%

32%

ALL MULTI-OWNER

S CORPORATIONS

TWO EARNERS

26%

THREE OWNERS

26%

FOUR OR MORE

OWNERS

66%

4% 4%

49%

21%

13%

29%

20%

12%

31%

FIGURE 9B

VIABIL ITY AND U TIL IZATION OF THE OS STR ATEGY FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL AND

PAYING NONZ E RO OWNE RS ' COMPE NSATION, BY NU MBE R OF

OWNE RS AND INTE R AC TION WITH THE LC STR ATEGY

"OS full" group

"OS partial" group

OS viability is ambiguous

"OS nonviable" group

"LC NONVIABLE"

GROUP ONLY

TWO OWNERS

57%

THREE OWNERS

FOUR OR MORE

OWNERS

28%

45%

23%

18%

23%

29%

14%

39%

ALL MULTI-OWNER

S CORPORATIONS

TWO EARNERS

43%

THREE OWNERS

41%

FOUR OR MORE

OWNERS

23%

43%

24%

10%

31%

24%

12%

36%

FIGURE 10A

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL , BY

VIABIL ITY OF THE OS STR ATEGY, NU MBE R OF OWNE RS AND

INTE R AC TION WITH THE LC STR ATEGY

"LC

NONVIABLE"

GROUP ONLY

TWO OWNERS

ALL MULTIOWNER

CORPORATIONS

TWO EARNERS

169,400

92,800

63,300

54,900

THREE OWNERS FOUR OR MORE

OWNERS

83,300

136,300

166,100

"OS nonviable" group

95,700

84,800

63,200

55,100

136,400

"OS full" group

THREE OWNERS FOUR OR MORE

OWNERS

FIGURE 10B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL , BY

VIABIL ITY OF THE OS STR ATEGY, NU MBE R OF OWNE RS AND

INTE R AC TION WITH THE LC STR ATEGY

TWO OWNERS

ALL MULTIOWNER

CORPORATIONS

TWO EARNERS

84,500

65,700

39,400

22,600

26,900

THREE OWNERS FOUR OR MORE

OWNERS

60,700

"OS nonviable" group

82,300

70,100

60,700

39,800

26,700

"LC

NONVIABLE"

GROUP ONLY

22,700

"OS full" group

THREE OWNERS FOUR OR MORE

OWNERS

FIGURE 11A

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL AND A

VIABL E OS STR ATEGY, BY DEGR E E OF U TIL IZATION, NU MBE R

OF OWNE RS AND INTE R AC TION WITH THE LC STR ATEGY

"OS partial" group

"LC

NONVIABLE"

GROUP ONLY

TWO OWNERS

ALL MULTIOWNER

CORPORATIONS

TWO EARNERS

83,300

136,300

109,600

188,700

THREE OWNERS FOUR OR MORE

OWNERS

68,000

54,900

136,400

119,000

84,800

72,100

55,100

193,300

"OS full" group

THREE OWNERS FOUR OR MORE

OWNERS

FIGURE 11B

AVE R AGE COMPE NSATION PE R COMPE NSATE D OWNE R FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL AND A

VIABL E OS STR ATEGY, BY DEGR E E OF U TIL IZATION, NU MBE R

OF OWNE RS AND INTE R AC TION WITH THE LC STR ATEGY

"LC

NONVIABLE"

GROUP ONLY

TWO OWNERS

ALL MULTIOWNER

CORPORATIONS

TWO EARNERS

74,100

65,700

39,400

35,500

26,900

THREE OWNERS FOUR OR MORE

OWNERS

66,500

"OS partial" group

76,400

70,100

71,000

39,800

38,700

26,700

"OS full" group

THREE OWNERS FOUR OR MORE

OWNERS

FIGURE A_1A

R E L ATIONS HIP BE TWE E N COMPE NSATION OF OFFICE RS AND

COMPE NSATION OF OWNE RS FOR S COR POR ATIONS WITH A

POS ITIVE INCOM E POOL , BY NU MBE R OF OWNE RS

No compensation of either officers or owners

Compensation of officers = compensation of owners

Compensation of officers > compensation of owners

Compensation of officers < compensation of owners

ONE OWNER

30%

TWO OWNERS

26%

THREE OWNERS

27%

BETWEEN FOUR AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

41%

21%

38%

22%

27%

32%

20%

36%

13%

14%

25%

21%

22%

20%

27%

32%

FIGURE A_1B

R E L ATIONS HIP BE TWE E N COMPE NSATION OF OFFICE RS AND

COMPE NSATION OF OWNE RS FOR S COR POR ATIONS WITH A

NEGATIVE INCOME POOL , BY NU MBE R OF OWNE RS

Compensation of officers > compensation of owners

Compensation of officers < compensation of owners

ONE OWNER

84%

Compensation of officers = compensation of owners

TWO OWNERS

82%

No compensation of either officers or owners

THREE OWNERS

79%

BETWEEN FOUR AND

SEVEN OWNERS

80%

6% 7%

EIGHT OR MORE

OWNERS

78%

5% 7%

FIGURE B_1A

DISTR IBU TION OF OWNE RS BY AC TIVITY L E VE L FOR S

COR POR ATIONS WITH A POS ITIVE INCOME POOL , BY

NU MBE R OF OWNE RS

Passive

ONE OWNER

76%

TWO OWNERS

79%

THREE OWNERS

Nonprofit

14%

67%

BETWEEN FOUR AND

SEVEN OWNERS

EIGHT OR MORE

OWNERS

Ambiguous

57%

37%

13%

19%

14%

22%

26%

Nonpassive

26%

11%

FIGURE B_1B

DISTR IBU TION OF OWNE RS BY AC TIVITY L E VE L FOR S

COR POR ATIONS WITH A NEGATIVE INCOME POOL , BY

NU MBE R OF OWNE RS

Nonpassive

ONE OWNER

Passive

61%

TWO OWNERS

45%

29%

23%

54%

BETWEEN FOUR AND

SEVEN OWNERS

Nonprofit

66%

THREE OWNERS

EIGHT OR MORE

OWNERS

Ambiguous

17%

34%

42%

24%

30%

11%

12%

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.