-
How the IRS Determines Reasonable Compensation using the IRS Job Aid
- June 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 3,523By Paul S. Hamann & Jack Salewski, CPA, CGMA
Over the last decade, the IRS has steadily and methodically tackled the compliance hassle that is reasonable compensation. According to an exhaustive 2009 GAO Report, S Corps were under-reporting shareholder compensation by more than $23 billion (for tax years 2003-2004) (Ruh-Roh Reorge!)
A few years later the IRS put together a game plan for its staff. This internal “Job Aid” sets out when and how penalties should be assessed and details three approaches for determining reasonable compensation. It also comes with a warning: “This Job Aid is not an official pronouncement of law…” In sports lingo, the courts are still going to referee, but at least now we understand the rules of the game. We’re no longer playing Calvinball, making it up as we go along (shout out to you Calvin & Hobbes fans!) and that was a huge win for tax preparers and taxpayers.
With the likelihood of increased audit attention on S Corps (more on this next month), moving your approach from myths or guessing to employing a fact-based strategy (as outlined in the IRS Job Aid) will greatly reduce the risk for the preparer (Are You at Risk for Preparer Penalties?) and S Corp that may be relying on myths such as “Rules of Thumb” or “Safe Harbors”.
The three approaches discussed in the Job Aid are: (more…)
-
Reasonable Compensation for all your S Corps in Three EZ Steps
- May 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
Views: 3,721By Paul S. Hamann & Jack Salewski, CPA, CGMA
“The only reason for time is so that everything doesn’t happen at once.” Albert Einstein
Use the time to your advantage! Here’s how one RCReports subscriber brought every S Corp he worked with into Reasonable Compensation compliance in three easy steps. (Full disclosure: The steps below assume you have an RCReports account.)
-
Are You Using the Right Approach to determine Reasonable Compensation?
- April 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
Views: 2,586By Paul S. Hamann & Jack Salewski, CPA, CGMA
Although there are general guidelines to help you pick the best approach to determine reasonable compensation, there are no hard and fast rules. For the overwhelming majority of your clients, one of two common approaches that rely on comparability data should do the trick. For the occasional client that just doesn’t seem to fit any molds, there is an approach for them, too.
-
How should the Directors of an S Corp be paid: 1099 or W-2?
- March 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
Views: 6,021By Paul S. Hamann & Jack Salewski, CPA, CGMA
The most common question we receive is if an S Corp owner can pay themselves via 1099 or must it be W-2. (Find the answer HERE)
But what is the correct treatment of Director’s Fees? Is it a W-2 or a 1099? Let’s take an in-depth dive into this question. (more…)
-
Strategies for Reasonable Compensation and Multiple S Corps
- February 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
Views: 2,124By Jack Salewski, CPA, CGMA & Paul S. Hamann
There are numerous issues when a business owner is a shareholder in more than one S Corp. Does the shareholder have to complete a reasonable compensation assessment (RCA) for each corporation, or will one assessment do? Does each corporation need to pay wages? What happens if the owner is above the Social Security maximum?
-
Rule of Thumb Used to Calculate Reasonable Compensation Shot Down in Court
- January 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 3,488By Paul S. Hamann & Jack Salewski, CPA, CGMA
Accountants are facts and figures folk. Accountants rely on data and analysis, not myths and tales.
Well, not always. In 2020 we asked 4,671 Tax Advisors if the IRS recognized Rules of Thumb such as a 50/50 split between distributions and reasonable compensation. Thirty-three percent said yes.
The IRS “Rule of Thumb” is a myth. But it’s a fact that we found 1,555 professional accountants who relied on this myth. (more…)
-
10 Reasonable Comp Points to Cover with Your Clients this December
- December 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 972By Paul S. Hamann & Jack Salewski, CPA, CGMA
Without an accurate Reasonable Compensation figure, tax planning is just a guess. (more…)
-
COVID Distribution Strategy for S Corps – Avoid a 15% Reasonable Compensation Penalty
- November 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 1,593By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID has taught us a lot about protecting ourselves, and not just about wearing a mask. We’ve learned a lesson on how to use distributions to protect a company’s assets during any prolonged crisis.
Distributions are the expected reward for a well-run company. Plus, distributions protect funds from being at risk if the company gets involved in litigation. But the third reason for distributions you may have never considered is what CPA David Kolts dubs the 15% Reasonable Compensation Penalty. (Penalty here refers to consequence or disadvantage, not punishment.) (more…)
-
Should you adjust Reasonable Compensation in the age of COVID?
- October 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 968By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID is affecting everything in 2020, and that includes Reasonable Compensation. Business owners may be putting in more hours, or less, taking on new online tasks, or giving themselves a pay cut along with their employees. As businesses adapt to the pandemic, Reasonable Compensation calculations must be adjusted as well. “Set it and forget it” doesn’t work anymore in 2020.
What adjustments are warranted? There are three primary adjustments you should consider discussing with your S Corp. owners before the end of the year and a few others you should be aware of. (more…)
-
The Benefits of Establishing Reasonable Compensation
- September 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 549By Jack Salewski, CPA, CGMA & Paul S. Hamann
We find it perplexing how often S Corp. owners – who invest in their business with an eye on the future and carefully analyze the cost/benefit of every decision – take a short-term, simplistic approach to reasonable compensation: Just pick the lowest possible number to minimize payroll taxes.
A reasonable compensation calculation impacts far more than just this year’s payroll tax. Talking with your clients about the benefits of accurately establishing compensation can be a life saver in retirement, sale or transfer of the business, or in the event of disability. (more…)