Question 1
An ethical issue that may arise regarding distribution and wages to shareholder-employees is tax evasion through disguising wages as distributions. Tax obligations need to be met according to both the legal and biblical views. The IRS requires shareholder-employees to pay taxes as per the relevant tax laws to allow the government to provide vital services to its citizens. According to Romans chapter 13, verse 6, taxes should be paid to whom they are owed (Van, 2015). However, the shareholder-employee may be tempted to avoid meeting such obligations to ensure they are left with more earnings. Shareholder-employees do not have to pay taxes on the distributions they receive in the form of earnings and profits (Schenk, 2017) . Such distributions pass to them, given that they are the owners of the S-corporation. Such owners are also employees and, in this case, have to pay themselves salaries, which have to be taxed. Such a scenario presents the shareholder-employee with an opportunity to conceal the salaries as distributions to evade meeting the tax obligations. In effect, the shareholder-employee faces an ethical issue when they disregard both the legal and biblical views on paying taxes.
Question 2
As a tax accountant of the S-corporation, I would provide the shareholder-employee with a Schedule K-1, which depicts the shareholder's portion of the entity's income or loss. I would then review the form filled by the shareholder-employee and compute the entity’s earnings to ensure they have declared the right distribution amount. Such a control measure would ensure that salaries are not added to the distribution amount. In this regard, the shareholder-employee will pay the right amount of taxes and, in effect, the ethical issue regarding tax avoidance will be avoided.
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References
Schenk, D. H. (2017). Federal taxation of s corporations . Law Journal Press.
Van, D. H. (2015). Our program . Lexham Press.
