My spouse and I have an S-corp, but he does not materially participate. I receive W-2 paychecks. Is he required to receive reasonable pay if he does not participate?

[Anonymous]

My spouse and I have an S-corp, but he does not materially participate. I receive W-2 paychecks as an employee. Is he required to receive reasonable pay if he does not participate? Does it matter if he is counted as an "officer" or a "shareholder"? Also, in addition to my W-2 salary, we also take some owner draws. Can I count the draws as his reasonable pay? What section should I report the draws in if he can or cannot take this as his pay?

[Phillip1 · Accepted solution]

No. 

If he does not participate in the business, he would not be considered an employee.

See the following from the IRS site: S Corporation Employee, Shareholders and Corporate Officers

Who is an Employee?

The definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code include corporate officers. When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages.

The fact that an officer is also a shareholder does not change this requirement.  Such payments to the corporate officer are treated as wages. Courts have consistently held S corporation officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes.

If an officer does not perform any services or only performs minor services and is not entitled to compensation, the officer would not be considered an employee.