RCReports - Frequently Asked Questions
What is a Reasonable Compensation Report for a Shareholder-Employee of an S Corp?
A Reasonable Compensation Report is a thorough accounting of all the services a shareholder-employee provides for their S Corp. The RCReports interview guides a shareholder-employee through a simple 7-step interview to generate a reasonable compensation figure.
Does RCReports work with Internet Explorer
Yes but you must be using version 11. RCReports will not work in earlier versions of Internet Explorer. To see what version of Internet Explorer you are using check ’About Internet Explorer’ located in ’Help’ tab on the Internet Explorer toolbar.
RCReports recommends Chrome or Firefox for superior graphics and fastest navigation.
What are the IRS guidelines for determining Reasonable Compensation for a shareholder-employee of an S Corp?
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state: "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation. In addition to the shareholder-employee direct generation of gross receipts, the shareholder-employee should also be compensated for administrative work performed.
There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.
Some factors considered by the courts in determining reasonable compensation:
• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• What comparable businesses pay for similar services
• The use of a formula to determine compensation
• Payments to non-shareholder employees
• Dividend history
• Timing and manner of paying bonuses to key people
• Compensation agreements
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