Reasonable Compensation FAQs

Yes, our wage database includes wages from 2001 to present. All plans now include all years.

To remove the Draft stamp, you will need to manually lock the report.  You can do this from the options drop down beside the report you want to lock – choose Lock Report

Keep in mind you will no longer be able to edit the report.

The report will lock automatically after 30 days, unless you lock it manually before that.

For more on the subject click HERE

Reasonable Compensation figures include taxable Medicare wages and flexible spending accounts. Reasonable Compensation figures do not include non-taxable fringe benefits such as health insurance, vehicle or vehicle allowance, stock options, company loans and other items not reported on a W-2 as Medicare wages.

Example 1: (S Corp)

• Cash available for reasonable compensation, health insurance payments, and distribution: $130,000
  • Reasonable compensation based on RCReports: $80,000
  • Health insurance: $15,000
• In this example the W-2 would be as follows:
  • Boxes 1 and 16 would reflect $95,000
  • Boxes 3 and 5 would reflect $80,000
  • Box 14 will list SCorp MP (S Corporation Medical Premiums) of $15,000
  • The taxpayer would have distributions of $35,000

Example 2: (S Corp) [IRA/401k Contribution]

• Cash available for reasonable compensation, health insurance payments, and distribution: $130,000
  • Reasonable compensation based on RCReports: $80,000
  • Health insurance: $15,000
  • SEP IRA/401k: $20,000 (Withheld from shareholder’s wages as company contributions and are NOT part of reasonable compensation since they aren’t Medicare wages)
• In this example the W-2 would be as follows:
  • Boxes 1 and 16 would reflect $75,000
  • Boxes 3 and 5 would reflect $80,000
  • Box 12a would reflect $20,000 with the appropriate code detailing the retirement account type
  • Box 14 will list SCorp MP (S Corporation Medical Premiums) of $15,000
  • The taxpayer would have distributions of $35,000

Example 3: (S Corp)

• Cash available for reasonable compensation, health insurance, and distributions: $85,000
  • Reasonable compensation based on RCReports $80,000
  • Health insurance $15,000
• In this example the W-2 would be as follows:
  • Boxes 1 and 16 of the W-2 would reflect $85,000
  • Boxes 3 and 5 of the W-2 would reflect $70,000
  • Box 14 will list SCorp MP (S Corporation Medical Premiums) of $15,000
  • The taxpayer would have distributions of $0. Since the shareholder took only $70,000 out of the company, that turns out to be his reasonable compensation for the year because the IRS has held that the amount of compensation will never exceed the amount received by the shareholder.

This is by far the number one question we receive, and the answer is both simple and complex. Why? Because the amount of Reasonable Compensation actually paid is tied to distributions, not profit or loss. [Read More]

RCReports bases its methodology off IRS guidelines and court cases. In a recent court case McAlary v. the IRS, both the IRS expert and the courts use the industry standard of 40 hours per week even though Mr. McAlary worked well over 40 hours per week (he was in the 60 to 80 hours per week range). You can find this court case and other helpful information in the resource library located in the tools tab.

Therefore, we limit hours to 40 for our S & C Corp Compliance Reports. If you want to exceed 40/week you can accomplish this by running a Planning report for the client. Although we don’t recommend exceeding 40/week we do not limit hours to 40 in the Planning (or Normalization) reports.

Picture yourself in a room of 100 peers who perform the same task.  How would you rate yourself among the 100 people in the room?  Bottom 10% rate proficiency low, top 10% high and so on.

Rating proficiency is a judgment call, but it is based on some perception of how well one performs a particular task.

Our compensation estimates are generated using a proprietary, statistically validated methodology. Although the underlying data sources and calculations are confidential, all results meet strict reliability and confidence standards. Our methodology has been successfully relied upon in both IRS examinations and judicial proceedings, including the Reinsch court case. When our reports are used in examinations or litigation, we provide a comprehensive Methodology report detailing our analytical framework and supporting assumptions.