18 min
Episode 10: Determining Reasonable Compensation The Growth Advisor Podcast
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- Management
Today’s episode focuses on the concept of reasonable compensation for S-Corp and C-Corp business owners.
Reasonable compensation is often misunderstood, but it is crucial for tax planning and compliance.
The episode highlights the importance of understanding reasonable compensation and provides insights into how to determine it accurately.
Determining Reasonable Compensation:
The cost approach or “many hats” approach is commonly used.
This approach involves evaluating all tasks performed by the shareholder employee based on a 40-hour workweek or 2,080 hours per year.
Labor statistics for the geographic area are considered to determine compensation for each task.
The total compensation is the sum of various activities performed in the business.
Relationship Between Reasonable Compensation and Distributions:
For S-Corp owners, a reasonable salary must be paid, but additional distributions can be taken if there is sufficient basis or equity in the business.
Distributions taken without paying a reasonable salary can be reclassified as payroll, leading to penalties, interest, and payroll taxes.
Keeping the salary too high or too low can have implications, including potential IRS scrutiny.
Retirement and Social Security Considerations:
Paying oneself a reasonable salary affects social security benefits and retirement planning.
Minimizing profits by paying a very low salary can result in reduced social security benefits in the future.
Reasonable compensation serves as retirement and social security funds, ensuring a secure financial future.
Actions to Ensure Reasonable Compensation Compliance:
Seek professional help to conduct a reasonable compensation study if unsure about the adequacy of compensation.
If discrepancies are identified, distributions can be recategorized as reasonable compensation to align with IRS requirements.
It is recommended to maintain accurate payroll records and consult payroll services to ensure compliance.
Regularly review and reconcile reasonable compensation based on changing business dynamics, labor market rates, and job roles.
If you require assistance with determining reasonable compensation for your S Corp, we offer reasonable compensation studies.
Schedule the meeting today!
Today’s episode focuses on the concept of reasonable compensation for S-Corp and C-Corp business owners.
Reasonable compensation is often misunderstood, but it is crucial for tax planning and compliance.
The episode highlights the importance of understanding reasonable compensation and provides insights into how to determine it accurately.
Determining Reasonable Compensation:
The cost approach or “many hats” approach is commonly used.
This approach involves evaluating all tasks performed by the shareholder employee based on a 40-hour workweek or 2,080 hours per year.
Labor statistics for the geographic area are considered to determine compensation for each task.
The total compensation is the sum of various activities performed in the business.
Relationship Between Reasonable Compensation and Distributions:
For S-Corp owners, a reasonable salary must be paid, but additional distributions can be taken if there is sufficient basis or equity in the business.
Distributions taken without paying a reasonable salary can be reclassified as payroll, leading to penalties, interest, and payroll taxes.
Keeping the salary too high or too low can have implications, including potential IRS scrutiny.
Retirement and Social Security Considerations:
Paying oneself a reasonable salary affects social security benefits and retirement planning.
Minimizing profits by paying a very low salary can result in reduced social security benefits in the future.
Reasonable compensation serves as retirement and social security funds, ensuring a secure financial future.
Actions to Ensure Reasonable Compensation Compliance:
Seek professional help to conduct a reasonable compensation study if unsure about the adequacy of compensation.
If discrepancies are identified, distributions can be recategorized as reasonable compensation to align with IRS requirements.
It is recommended to maintain accurate payroll records and consult payroll services to ensure compliance.
Regularly review and reconcile reasonable compensation based on changing business dynamics, labor market rates, and job roles.
If you require assistance with determining reasonable compensation for your S Corp, we offer reasonable compensation studies.
Schedule the meeting today!
18 min