Reasonable Compensation
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Reasonable Compensation & the Single Shareholder S Corp
- April 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Paul S. Hamann
“If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?”
This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.” (more…)
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What if Reasonable Compensation is more than an S Corp Owner can afford?
- October 1, 2019
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
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.
Depending on the company’s financial condition and business strategy, a shareholder-employee may be able to take Reasonable Compensation plus a distribution, just Reasonable Compensation, or neither. What the shareholder-employee can’t do is take a distribution instead of Reasonable Compensation.
To help you better understand, let’s run through a few simple scenarios and then move on to some more advanced ones. Keep in mind the following:
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1099 or W-2 for Shareholder-Employees of S Corps? Updated for 199A
- February 1, 2019
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
It is a common scenario. A current client elects S Corp status but forgets to tell you, or a new S Corp client comes your way in the new year. Both have taken distributions but NO reasonable compensation.
Do you advise paying wages via W-2 or 1099-NEC?
Answer: W-2 [It’s the Law see below]
That being said there are times when it may make more sense to beg for forgiveness than to comply. (more…)
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What Approach Should I Use to Determine Reasonable Compensation
- November 1, 2018
- Posted by: Paul Hamann
- Category: Blog
By 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.
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Reasonable Compensation Past, Present & Future
- February 1, 2017
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
It doesn’t seem that long ago that the best advice for determining reasonable compensation was a rule of thumb or safe harbor figure; boy, have things changed. Beginning in 2005 the IRS launched a study of S Corp compliance. Since launching this study the IRS has:
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Why Add Reasonable Compensation to your Practice?
- July 1, 2016
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
There are more answers than you think. Certainly, you want to research and document your S Corp client’s reasonable compensation figure or help them choose the best entity for their situation. But even more importantly – it builds a closer relationship with your client, enhancing your ability to become a trusted advisor, the person your clients turn to first – because you know them best.
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Hey – I’m Worth More Than That!
- June 1, 2014
- Posted by: RCR Admin Team
- Category: Archived
By Paul S. Hamann & Jack Salewski, CPA
“Hey – I’m worth more than that “is a phrase S Corp and Small Business Owners express quite frequently after researching their Reasonable Compensation figure. Why? – Because most S Corp and Small Business Owners don’t understand what Reasonable Compensation is. They mistakenly equate Reasonable Compensation with their dedication and commitment to their business.
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Why there is no right answer for Reasonable Compensation – but there are wrong ones
- April 1, 2014
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann
The wrong answer goes something like this: I guessed; I split my distribution 50/50, or any other answer that involves a WAG. In other words, any answer that does not have supporting information will probably have little creditability with the IRS. So if there are wrong answers how come there aren’t right answers? The easiest way to think about this puzzle is to stop thinking “I need a right answer” and start thinking “I need a credible answer.”
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Reasonable Compensation Then & Now
- October 1, 2013
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann
It doesn’t seem that long ago that the best advice for determining reasonable compensation was a rule of thumb or safe harbor figure; boy, have things changed. Beginning in 2005 the IRS launched a study of S Corp compliance. Since launching this study the IRS has:
