Real case · checked 19 October 2026
A CPA paid himself $24,000. The court found his work was worth $91,044.
In David E. Watson, P.C. v. United States, the Eighth Circuit upheld treating part of an S corporation owner's dividends as wages for payroll tax.
The short version
David Watson, a CPA, was the only shareholder of his S corporation. It paid him a $24,000 salary and the rest as dividends.
A federal court found his work was worth $91,044 a year, and the appeals court agreed. The extra counted as wages.
The IRS says pay reasonable compensation before you take distributions. Ask your tax advisor what's reasonable for your role.
In numbers
| Year | Salary paid | Reasonable pay found |
|---|---|---|
| 2002 | $24,000 | $91,044 |
| 2003 | $24,000 | $91,044 |
Sources
Checked on 19 October 2026.
"In both 2002 and 2003, DEWPC distributed $24,000 to Watson as employment compensation."
David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012). No. 11-1589, filed 21 February 2012. "the district court considered these factors, among other things, in finding that the value of Watson's services was $91,044 for 2002 and 2003."
David E. Watson, P.C. v. United States. Same opinion. "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee."
IRS: S corporation compensation and medical insurance issues. Last reviewed 3 March 2026.
The tax at issue was the employer's FICA tax, assessed against Watson's S corporation. The IRS page cites this case.
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