Reasonable Compensation Certification

Business owners have a unique opportunity to save on taxes.

Every job in every industry has a compensation associated with it. If you own a business – particularly an S corporation – the IRS recognizes that an employer is, many times, an “employee” too. When that’s the case, you’re expected to pay yourself what’s considered a reasonable wage, more commonly referred to as reasonable compensation. It can be daunting to determine what that amount should be to offer you the most in tax savings and also to help keep you from becoming the subject of an audit. Miser Wealth Partners is a financial leader in helping business owners by advising and consulting on reasonable compensation and many other unique and lesser-known tax savings in Knoxville, Tellico Village, and all of East Tennessee.

What is reasonable compensation?

The IRS defines reasonable compensation as the value that would ordinarily be paid by like enterprises for like services under like circumstances. An officer of a corporation is generally considered an employee with wages that are subject to withholdings just as any other employee. But determining the wage for such positions requires a special compensation analysis, and it’s important to find an accountant that specializes and has experience in this tax-saving strategy. That’s where Miser Wealth Partners comes in.

What is used to determine reasonable compensation?

In configuring what constitutes reasonable compensation, the IRS typically looks at the source of the corporation’s gross receipts and what the shareholder-employee did for the S corporation to help generate them. The three main sources of gross receipts are services of shareholders and non-shareholder employees, capital, and equipment.

Which gross receipts are subject to self-employment taxes?

Gross receipts from the services of non-shareholder employees, capital, and equipment are treated as non-wage distributions and are not subject to self-employment taxes. If gross receipts are generated by a shareholder’s services, however, then payments to the shareholder-employee are classified as wages that are subject to self-employment taxes.  

What methods are used to determine reasonable compensation?

Some business owners may determine reasonable compensation based on total profits earned. For example, let’s say your business earns $100,000 in profit after expenses and you’re trying to figure out what a reasonable compensation would be to pay yourself. You may think that whole $100,000 profit would be subject to self-employment tax, which is 15.3%. That would mean approximately $15,300 would go to the IRS to pay for FICA taxes and state unemployment.

Aside from this method, many accountants may employ what’s known as the 60/40 rule to determine reasonable compensation. The 60/40 rule is an approach that some consider a means to help S corporation owners determine a reasonable salary by dividing their business income into two parts – 60% designated as salary and 40% paid as shareholder distributions. Although many consider this a rule of thumb, the 60/40 method is not approved by the IRS. As a matter of fact, there’s no substantiation that if you use this technique you’re guaranteed to be in good graces with the IRS. It’s just not accurate.

With all the misconceptions and gray areas surrounding both of these reasonable compensation calculation methods, it’s important to enlist the help of seasoned financial professionals to help you get the most bang for your buck.

Why choose Miser for determining reasonable compensation in your business?

Bottom line, Miser’s scenario for calculating reasonable compensation can help you save. The 60/40 rule, in particular, is a myth that’s been propagated for quite some time. Our S corporation tax strategy involves expertly determining an appropriate salary to distribution ratio. An example would be a business owner paying themselves 30% while taking 70% for distribution. A smaller wage and larger distribution often lead to lower taxes, because distributions aren’t subject to the 15.3% self-employment tax. But many factors can play into this scenario. Reasonable compensation is a complex calculation, so you’ll want a knowledgeable partner, like Miser Wealth Partners, to navigate all the uncertainties.

To keep your business protected, Miser Wealth Partners calculates reasonable compensation the way the IRS does, going through the exact same methodology to arrive at a more than reasonable conclusion. Perhaps most importantly, Miser Wealth Partners holds access to the largest database of wages in the U.S., a database three times larger than what the Bureau of Labor Statistics uses. This database helps to accurately calculate reasonable compensation for a variety of business owners across the nation.

When you’re dealing with the IRS, you want to be sure to have outside objective reports that help to establish a defensible position. Miser Wealth Partners works to provide that solid foundation and proudly offers that peace of mind.

Who are candidates for Miser’s reasonable compensation service?

In many cases, 1099 employees and business owners are prime candidates for this type of tax savings strategy. Miser Wealth Partners assists S corporations, LLCs, and partnerships with all their reasonable compensation needs and a host of other important financial services. In short, it’s worth it for every business owner to explore whether this is a viable strategy for their business.

Call Miser Wealth Partners to secure your future today!

Miser is one of the only firms in the Southeast with the expertise to successfully determine reasonable compensation. So, if you have a corporation in the state of Tennessee and you find yourself looking far and wide for someone who knows what they’re doing, look no further than Miser Wealth Partners. We invite you to give us a call today at (865) 281-1616, email, or click here to schedule an appointment online.

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