# Identifying and Estimating the Effect of

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Identifying and Estimating the Effect of
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.

1

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
1

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.
2
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.
3
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

2

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.
4
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.

3

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

5

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.
6
U.S. Government Accountability Office, “Actions Needed to Address Noncompliance with S Corporation Tax
Rules,” (December 2009), www.gao.gov/new.items/d10195.pdf.
7
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
8
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)].

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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

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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.
10
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.

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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:

11

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.
12
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.

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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

7

•

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

8

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.

9

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
13

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.
14
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.

10

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).

11

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,

12

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.
15

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.
16
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.
17
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

13

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.

14

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
18

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.
20
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.
19

15

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

16

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

17

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.

18

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

21

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.

19

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:

20

Result of nonpassivity test
Strongly pass
Strongly pass
Strongly pass
Weakly fail
Inconclusive
Inconclusive
Strongly fail
Weakly fail
Inconclusive
Strongly fail
Strongly fail
Weakly fail
Strongly fail
Weakly fail
Strongly pass
Inconclusive

Result of passivity test
Strongly fail
Weakly fail
Inconclusive
Strongly fail
Strongly fail
Weakly fail
Strongly pass
Strongly pass
Strongly pass
Weakly fail
Inconclusive
Inconclusive
Strongly fail
Weakly fail
Strongly pass
Inconclusive

Assignment
Nonpassive
Nonpassive
Nonpassive
Nonpassive
Nonpassive
Nonpassive
Passive
Passive
Passive
Passive
Passive
Passive
See below
Ambiguous
Ambiguous
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.

21

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):
i)

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.

22

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
FICAc
SECAd
SECAd
SECAd
SECAd

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

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

b.

C Corporation profits are also subject to indirect taxation through the individual income tax on dividends
and realized capital gains.

c.

FICA = Federal Insurance Contributions Act

d.

SECA = Self-Employment Contributions Act

e.

Members of limited liability companies who actively participate in the business must pay SECA tax on
their distributive share of profits.

f.

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

23

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

0
0
50,000
50,000

0
0
50,000
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

0
12,500
0
12,500

0
12,500
0
12,500

34,391

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

0.80
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

0
0
80,000
80,000

0
0
20,000
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

0
20,000
0
20,000

0
5,000
0
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

24

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

0.80
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

0
0
50,000
50,000

34,835
2,665
12,500
50,000

0
0
80,000
80.000

0
0
20,000
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

0
12,500
0
12,500

8,709
3,125
5,330
17,164

0
20,000
0
15,308

0
5.000
0
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

25

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

0.5452
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

0
0
50,000
50,000

7,701
589
41,709
50,000

0
0
54,520
54,520

0
0
45,480
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

0
12,500
0
12,500

1,925
10,427
1,178
13,531

0
11,630
0
11,630

0
11,370
0
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
0

26

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

0
0
8,290
8,290

46,447
3,553
41,710
91,710

0
0
8,290
8,290

46,447
3,553
41,710
91,710

0
0
16,580
16,580

0
0
83,420
83,420

Individual income tax
…on wages
…on passed-through profits
FICA tax (employer & employee shares)
Total tax liability

0
2,073
0
2,073

11,612
10,428
7,106
29,146

0
2,073
0
2,073

11,612
10,428
7,106
29,146

0
4,145
0
4,145

0
20,855
0
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
0

62,564
0

12,435
6,218

62,565
1

27

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

28

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

29

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

3%

7%

THREE OWNERS

3%

11%

BETWEEN FOUR AND
SEVEN OWNERS

3%

8%

12%

EIGHT OR MORE
OWNERS

LC relevance is ambiguous

3%

"LC irrelevant" group

"LC full" group

26%

21%

18%

21%

7%

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

5%

THREE OWNERS

3%

BETWEEN FOUR AND
SEVEN OWNERS

2%

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%

30

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%

5%

27%

43%

56%

59%

2%

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%

4%

40%

44%

63%

31

10%

15%

1%

THREE OWNERS

"LC nonviable" group

16%

1%

53%

2%

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

32

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

4%

3%
3%

"OS full" group

46%

34%

20%

9%

9%

13%

10%

8%

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

6%

6%

7% 4% 4%

5%

EIGHT OR MORE
OWNERS

4%

2%

BETWEEN FOUR AND
SEVEN OWNERS

2%

TWO OWNERS

OS viability is ambiguous

1%

"OS full" group

6% 5%

14%

33

"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

34

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

35

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

9%

91%

FOUR OR MORE
OWNERS

9%

91%

ALL MULTI-OWNER
S CORPORATIONS
TWO EARNERS

39%

THREE OWNERS
FOUR OR MORE
OWNERS

61%

18%

82%

7%

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

7%

93%

FOUR OR MORE
OWNERS

5%

95%

ALL MULTI-OWNER
S CORPORATIONS
TWO EARNERS
THREE OWNERS
FOUR OR MORE
OWNERS

71%

29%

88%

12%

94%

6%

36

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

37

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%
8%

9%

23%

29%

5%

14%
39%

ALL MULTI-OWNER
S CORPORATIONS
TWO EARNERS

43%

THREE OWNERS

41%

FOUR OR MORE
OWNERS

23%

43%
24%
10%

31%

38

7%
24%

7%
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
S
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
S
CORPORATIONS

39

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
S
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
S
CORPORATIONS

40

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%

9%

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%

7%

7%

2%

Compensation of officers = compensation of owners

TWO OWNERS

82%

8%

7%

3%

No compensation of either officers or owners

THREE OWNERS

79%

7%

8%

6%

BETWEEN FOUR AND
SEVEN OWNERS

80%

6% 7%

7%

EIGHT OR MORE
OWNERS

78%

5% 7%

41

9%

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

5%

14%

6%

67%

BETWEEN FOUR AND
SEVEN OWNERS

EIGHT OR MORE
OWNERS

Ambiguous

9%

57%

37%

13%

19%

14%

22%

26%

5%

2%

Nonpassive

26%

4%

7%

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

9%

45%

29%

23%

6%

54%

BETWEEN FOUR AND
SEVEN OWNERS

Nonprofit

4%

66%

THREE OWNERS

EIGHT OR MORE
OWNERS

Ambiguous

17%

34%

42%

42

24%

30%

11%

12%

4%

8%

9%

12%

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A07f8f5222a4ed92c. Public record. Not legal advice.