Reasonable Compensation
Posted on May 7, 2021

“You see, I do what they can’t do, I just do me.” -Eve & Gwen Stefani

As the owner of a S Corporation, you know you bring talents to the company and provide services that no one else does. You also know that pass-through taxation is one of the biggest advantages of being a S Corp.

As a result, tax savings for you and the company are highest when the amount of payroll taxes is low. The way to do that is pay yourself as little as possible in salary but that will get you in HOT water with the IRS. They are aware of this scam and require that you pay yourself “reasonable compensation” for the job you perform.

It would be easy if the IRS just told you what reasonable compensation is but…they don’t. They have created an IRS fact sheet, with a list of 9 factors that you (and the courts) can use to determine reasonable compensation.

The 9 factors:

-training & experience

-dutes & respnsibilities

-time and effort devoted to the business-divident history

-payments to non

-shareholder employees-timing and manner of paying bonuses to key people

-what comparable businesses pay for similar services

-compensation agreements-the use of a formula to determine compensation

You may still feel confused after reading the IRS guidance…that happens to me too! Here are some different “formulas” people have used: 60% wages and 40% distributions, tax return data, salary data, wage base limit, and $100,000. You can look these up for more information.

As always, if you’re confused or overwhelmed contact a CPA when going through this process to help determine an amount. After that, do as Gwen Stefani says, “Now let me blow ya mind.”

#KnowYourBusiness #ildertonbookkeeping #reasonablecompensation #blowyamind #SCorporation #IRS #wagecalculation #Eve&Gwen