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Why Add Reasonable Compensation to your Practice?

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.

Talking with your client about Reasonable Compensation, and thus, all the hats they wear for their business is a natural conversation starter.  If you are an introvert like me, or your client holds information ‘close to the vest,’ developing a Reasonable Compensation figure is an ideal opportunity to get to know your clients’ business in depth.  Once the conversation has begun, professional instincts and training take over, and the trusted advisor relationship takes shape.

Our users discovered this serendipitously. They started out using RCReports for its stated purpose but soon discovered that the interview process built rapport, credibility, and trust. As a result, the practices that adopted this approach report 9 out of 10 Reasonable Compensation interviews yield at least one new engagement opportunity or service.  This simple conversation leads to opportunities to provide your clients with services they didn’t know existed, needed, or that you provided.

The accounting practices that use this approach tell us there is no need to “sell” anything.  Clients usually ask questions that lead to a natural discussion of ways your firm can genuinely help their business.  A few of the more popular topics are:

  • Retirement Planning
  • Succession Planning
  • The Virtual CFO
  • Entity Selection
  • Estate Planning
  • Payroll & Bookkeeping services

There are lots of classes, workshops, and conferences designed to teach CPAs, EAs and accountants how to build their practices beyond tax prep.  But it always starts with the cold call. Cold calling, even if it’s disguised as “checking in” (when in reality it is designed to drum up additional business) feels unnatural and contrived.  So, if you’re like me, you come back from a conference all revved up, make a few calls and quit.  Our clients can tell when we are not being ourselves; instead of building trust these calls damage it.

This is where Reasonable Compensation planning comes in.  Completing a Reasonable Compensation Report for a client is essential, practical, and makes sense as part of your role as CPA.

  • For new small business clients, make it part of the intake and information gathering process.  New businesses owners should know their Reasonable Compensation to help select the best entity, and as a guide for paying others in the company.  Although they may not initially know how many hats they might wear, discussing all the categories small business owners can perform tasks in, opens up discussions on bookkeeping and payroll just to name a few.  Perfect time to let your client know what services you provide.
  • For existing clients, it is part of the information required to do your job professionally.  Practitioners who are successful using this approach strongly recommend all their S Corp and small business clients complete a Reasonable Compensation report in the first year they offer the service – but do not require it.  In year two and three they begin to require it.

The clients that you have already built trust with normally take your advice and generally have little or no concern with the cost of the Report.  It is the clients who have a concern, that offer the most opportunity.  Why?  Because these are the clients you have yet to establish a trusted relationship with.  Consider this option with these clients: Offer not to charge them if they see no value at the end.  The insight into your clients business and the rapport developed is the real value.  Getting paid for the report is a bonus – the cherry on top.

At RCReports our goal from day one was clear: To simplify Reasonable Compensation for S Corps and Small Businesses.  Like other accidental discoveries, we were pleasantly surprised to hear our users had discovered another, very valuable use: The icebreaker they were looking for.

We thank our users all the time for upgrade ideas and referrals, and this time is no different.  Thank you, Richard, Luke, Casey, Ken and a few others who discovered a better way to determine Reasonable Compensation AND the perfect conversation starter for your small business clients and for sharing that valuable information with us and all your peers!

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