Abstract
This study provides empirical evidence on the extent to which taxes influence owners' compensation in small (fewer than 500 employees) Subchapter Selecting corporations (S corporations), taxable corporations that provide professional services (PSC corporations), and other taxable corporations (C corporations). Paying additional compensation to owner-employees likely increases the total after-tax income for PSC corporations with positive taxable income. Paying additional compensation to owner-employees is, however, less likely to increase the total after-tax income for C corporations and does not increase the total after-tax income for S corporations. Using data from the corporate tax returns of 503 small corporations, this study examines the marginal change in owners' compensation as taxable income changes. The study finds that, per dollar of taxable income, PSC corporations increase compensation to owneremployees significantly more than C corporations.
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