Reasonable Compensation: S-Corp Owners
Background
The Internal Revenue Service (IRS) requires that S-Corp owners who perform services for the corporation receive "reasonable compensation" for their work. This is to prevent owners from classifying all income as dividends, which are not subject to payroll taxes.
Purpose
A reasonable compensation report serves as documentation to support that the compensation paid to owners is fair and aligns with industry standards for similar roles. Failing to provide adequate compensation may lead to increased scrutiny from the IRS, potentially resulting in penalties and adjustments to the company's tax liabilities.
How are Reasonable Comp. Reports Generated?
Generating a reasonable compensation report for S-Corp owners involves a thorough and methodical process to ensure compliance with tax regulations and industry standards.
Job Analysis: Begin by conducting a comprehensive job analysis for the roles performed by S-Corp owners. This involves breaking down their responsibilities, skills, qualifications, and the time commitment required for each duty.
Industry Benchmarking: Research industry benchmarks and salary surveys to determine the typical compensation for similar roles within the same geographic area and industry. This comparative analysis helps establish a reasonable range for the compensation of S-Corp owners.
Regular Review and Adjustments: Periodically review and adjust compensation based on changes in job responsibilities, market conditions, and the financial health of the company. Regular reviews help ensure that compensation remains reasonable and competitive.
Retain Records: Maintain records of the reasonable compensation reports, supporting documentation, and any communication related to compensation decisions. Retaining these records is essential for potential audits or inquiries from tax authorities.
Get Help Generating a Reasonable Compensation Report
We can help you generate a Reasonable Compensation Report. We have access to the most reliable databases to ensure that your reasonable compensation can withstand IRS scrutiny.