- January 1, 2023
- Posted by: Abbie Deaver
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
This is a question we get a lot at the beginning of the year: “I just took on a new S Corp client and they didn’t take any Reasonable Compensation last year. What do I do?!”
First things first: Reasonable Compensation only applies if the owner takes a distribution. If the owner did not take any distributions last year, they are still in compliance. This situation is rare as most S Corp owners can’t go a whole year without taking salary or distributions from the business. If this does happen, the shortfall in owners’ compensation needs to be tracked so it can be made up in future years. If it comes up it is a great area for you to offer advisory services.
Be aware there are lookback periods that are associated with Reasonable Compensation. If the S Corp owner takes distributions for a two-year period, for example, they will need to pay themselves Reasonable Compensation for those two years. For more on this scenario take a look at example 4 in this blog post.
Ok, on to a more common scenario: The S Corp owner did take distributions out of the business but took zero or low reasonable compensation.