As a business owner operating as an S Corporation and actively involved in the day-to-day operations (like many of us!), the IRS requires you to compensate yourself with a "reasonable salary" through W-2 wages.
Many S Corporation owners often strive to minimize their reasonable salary within justifiable limits, aiming to mitigate self-employment taxes—a primary motivation for many Limited Liability Companies (LLCs) choosing S Corporation taxation. Profits exceeding the reasonable salary threshold remain untouched by self-employment taxes, resulting in approximately 15.3% in tax savings, a substantial sum.
However, before contemplating extremely low or even zero salaries (which can be risky!), it's crucial to recognize that the IRS is well aware of this tax-reducing strategy and may conduct audits to ensure compliance. Even when salaries are set with good intentions, the IRS retains the authority to deem them insufficient, leading to potential penalties and interest during audits.
Option 1: Opt for a higher reasonable compensation to potentially shield against IRS scrutiny, albeit risking overpayment in taxes without guaranteed immunity from fines and penalties.
Option 2: Safeguard both yourself and your finances by obtaining a personalized report that assesses and substantiates your appropriate reasonable salary, ensuring tax savings while minimizing exposure to potential IRS challenges.
You might find yourself thinking, "I've been doing fine so far... do I really need this?"
Support for reasonable compensation is often one of those things that may not seem necessary until it becomes crucial.
In recent times, accountants have noted a rise in challenges to reasonable compensation. With an additional $80 billion in IRS funding recently approved (enough to hire 87,000 new agents), experts anticipate a continued surge in these challenges.
Regrettably, retroactively providing adequate support for your reasonable compensation during an audit can be challenging. The most prudent course of action is to be proactive and secure a real-time Reasonable Compensation Study & Report. This not only assists in determining your reasonable compensation but also serves as vital support in case of an audit.
When it comes to matters related to the IRS, it's always better to be safe than sorry!
We've joined forces with RC Reports, a leading authority in reasonable compensation, to furnish you with a comprehensive report to substantiate your S Corporation owner wages.
This customized report is generated based on your responses provided through an online survey outlining your various job responsibilities. It's particularly beneficial for individuals who wear multiple hats in their business, handling roles such as sales, marketing, back-office tasks, management, HR, administration, and more.
Utilizing your responses and business location, the report extracts data from the latest Bureau of Labor Statistics, Census Bureau, and RC Reports wage database to estimate your reasonable salary. The report meticulously outlines all pertinent data, featuring charts and graphs that break down your job duties and compensation.
To ensure accuracy and reliability, the report results undergo a thorough review by a CPA, in this case, Ruben Garratt, CPA. Any recommendations or observations from this review will be communicated to you.
Notably, RC Reports boasts a 100% track record of salary calculations being upheld during audits, providing you with confidence and peace of mind. This report is designed to prevent the risk of facing substantial back taxes and fees due to salary reclassification, ensuring you don't pay more in taxes than necessary.
Get started with the Reasonable Compensation Study today! It includes:
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The Reasonable Compensation Study and Report employ the "Many Hats" approach to establish a reasonable salary, a method endorsed by the IRS for business owners engaged in multifaceted roles within their enterprises, as is often the case with small and micro-business proprietors.
The "Many Hats" methodology for determining suitable compensation for an S Corporation owner involves considering all the diverse tasks and responsibilities undertaken by the owner within the company, along with their proficiency levels in these various roles. Recognizing that S Corporation owners commonly juggle multiple responsibilities, spanning from managerial and administrative duties to hands-on involvement in day-to-day operations, the "Many Hats" strategy aids in determining an equitable and fitting wage for the owner. This approach takes into account the myriad duties and the time devoted to each, contributing to a fair assessment of the owner's compensation.
Reasonable Compensation Study & Report
Get started with the Reasonable Compensation Study today! It includes:
A detailed Reasonable Compensation Study that will provide a fully customized owner salary analysis and IRS court sited documentation.
A full review of your report by Ruben Garratt, CPA with feedback and suggestions provided.
