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Brussels Sprouts V. Reasonable Compensation

By Paul S. Hamann

Trying to get your S Corp clients to determine their reasonable compensation is a lot like trying to get a child to eat Brussels sprouts.  You can try to convince them that Brussels sprouts are good for you, while that pile of Brussels sprouts sits there just getting ever colder and even less appetizing.  But if you really want them eaten, you must put your foot down and require that the little green nemesis be eaten.

There is a long list of reasons why an S Corp owner should determine their reasonable compensation, but the only method that consistently works time and time again is to put your foot down and tell your S Corp clients it’s for their own good and require them to do it.  Tom Ochsenschlager, former head of tax for the American Institute of CPAs, says pay and payroll tax issues are a frequent source of friction with clients: “Sometimes you have to take them to the woodshed and say, ‘You need to report more income as pay for personal services.” – Wall Street Journal

Top 10 reasons why a Shareholder-Employee of an S Corp should determine their reasonable compensation figure annually:
10 – The IRS cares and they are watching
9 – Penalties and interest can more than double the amount of tax originally owed
8 – Preparer Penalties.  Should you have known…
7 – The DIF system is getting a tune-up
6 – S Corp audits on the rise (up 176% from ‘04 to ‘07) and climbing
5 – An ounce of prevention is worth a pound of cure
4 – Your Social Security account will thank you
3 – Because looking down at your shoes for answers during an examination sucks
2 – It is easy and affordable using RCReports
1 – Because determining your reasonable compensation is preferable to eating Brussels sprouts

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