If you're an S Corp owner who actively works in your business (as most of us do!) you're required to pay yourself a "reasonable salary" via W-2 wages.
Many S Corp owners usually aim to reduce their reasonable salary as much as defensible, because this helps to reduce self-employment taxes (which is the main reason most LLCs elect to be taxed as S Corp). Any profits above and beyond your reasonable salary don't have self-employment taxes removed, which saves about 15.3% in taxes...not chump change!
But, before we start setting absurdly low salaries for ourselves (or even no salary...yikes!), we also must remember that the IRS is fully aware of this strategy to reduce taxes...and they can (and will) come-a-knocking.
And even if we set our salary with the best of intentions, the IRS can STILL tell you it isn’t high enough and assess penalties and interest in an audit.
So, what's a small biz owner to do?
You COULD set a high reasonable compensation to protect yourself and potentially pay thousands more in taxes than you need to. But even then there is no guarantee you won’t have fines and penalties if the IRS doesn’t agree.
You can protect yourself and your pocketbook by getting a custom report that estimates and supports your appropriate reasonable salary, keeping tax savings top of mind.
You Might Be Saying...
"But I’ve been fine until now…do I really need this?"
Reasonable Compensation support is one of those things you don’t feel like you really need…until you do.
Accountants have seen a recent uptick in the number of challenges to Reasonable Compensation as of late. And with an additional $80 Billion in funding for the IRS recently passed (enough money to hire 87,000 new agents), most professionals expect these challenges to continue to increase.
Unfortunately, it can be difficult to “go back in time” and adequately support your reasonable compensation once you are actually under audit. The BEST thing you can do is be proactive and obtain a Reasonable Compensation Study & Report in real-time. This can help you both set your Reasonable Compensation AND support it if you were ever audited.
As with anything IRS-related…it’s better to be safe than sorry!
About the Reasonable Compensation Study and Report:
We’ve partnered with RC Reports, the premier company in reasonable compensation, to provide you with a quality report to support your S Corp owner wages.
- The report is fully custom using answers you provide via an online survey of your job duties.
- It is perfect for those who wear “many hats” in their business, such as sales, marketing, back-office, Manager, HR, admin, etc.
- Using your answers and business location, data will be pulled from the most current Bureau of Labor Statistics, Census Bureau, and RC Reports wage database to estimate your reasonable salary
- The report will detail all relevant data used, including charts and graphs showing your job duty and compensation breakdown
- The report results will also be reviewed by a CPA (Jamie Trull), and any recommendations or observations will be sent to the user
- RC Reports has a 100% record of salary calculations being upheld during an audit
- The report will give you peace of mind knowing you won’t have to pay tons of back taxes and fees because of a salary reclassification AND that you aren’t paying more in taxes than you need to!
How It Works
The Reasonable Compensation Study and Report uses the “Many Hats” approach to setting a reasonable salary, which is the method preferred by the IRS for business owners who perform several functions within their business (as most small and micro-business owners doa).
The "Many Hats" method of determining acceptable pay for an S Corporation owner involves taking into account all of the many tasks and duties that the owner fulfills within the company, as well as their relative level of proficiency at those tasks. This strategy acknowledges that S Corporation owners frequently wear several hats, handling a variety of jobs from management and administrative responsibilities to hands-on work in the day-to-day operations of the organization. The "many hats" strategy aids in determining a fair and appropriate wage for the owner by accounting for all of these many duties and the time spent on them.
The 5 Step Process:
Sign up for the RC Study. You’lll receive an email within 2 business days of sign up with the link to your personalized survey and a video explaining how to fill out the survey.
Fill out the Survey to the best of your ability. Note that estimates are completely ok.
You’ll be able to review the initial results of your survey immediately. Feel free to go back in and make changes to the inputs you’d like if anything looks incorrect or to assess the impact of making changes. You can update this as many times as you’d like.
Jamie Trull, CPA, will personally review your results and provide you with any comments or suggestions. Jamie will be reviewing for reasonableness, completeness, and potential tax-savings opportunities.
You may make any final changes you’d like based on Jamie’s comments, or ask any follow up questions. Once you are comfortable with the report, it will be finalized and the Draft watermark will be removed, and a final version will be downloadable for you to keep for support.
As it turns out, not all accountants are specifically knowledgeable when it comes to setting reasonable compensation. A recent poll by RC Reports showed that 77% of tax professionals were misinformed when it came to approved methodologies for determining reasonable salary.
It’s not just them though - googling reasonable compensation can give you all kinds of false information…including articles from typically reputable sources like Forbes and Entrepreneur Magazine.
You may even pay to consult with a tax professional who gives you a general rule of thumb but doesn’t give you the appropriate documentation you really need…leaving you vulnerable to the IRS.
And for those accountants who DO provide a full study and supporting report, the average cost is $700+, and they may require you to sign up for a costly monthly service package.
Not so with us…we want to give you what you need at a budget-friendly price so you can keep Uncle Sam happy...without breaking the bank or overpaying in taxes!Get Started Today
If you work through our process and find yourself unsatisfied...
All you need to do is send us an email at email@example.com before your report is finalized, and let us know your feedback so we can help you figure out the next step for you. Your satisfaction is our top priority!
Hey there, I'm Jamie Trull.
Financial Literacy Coach, Hamilton superfan, an enjoyer of a glass of Cabernet with a good mystery book, and — if you like —your guide as you get all those numbers together.
Even though I’ve got a CPA license and 15 years of experience in finance and accounting, my real passion is explaining complex topics to small business owners and solopreneurs in a non-technical way to make them easy to understand and put into practice.
I’m not one of those accountants that will use a whole bunch of buzzwords and jargon…we won’t be talking about things like “EBITDA” or “synergies” here (UGH). Instead, it’s all explained in words that make actual sense in the real world of entrepreneurship.
In other words, I’m not your father’s CPA.
And my #1 mission is to see more entrepreneurs not just surviving, but THRIVING in both their professional and personal lives.
Frequently Asked Questions
Can you guarantee I won’t be audited/ won’t be assessed penalties on reasonable compensation if I am audited?
Will my reasonable compensation as determined by the report save me the most taxes possible?
Can I get a report for past years?
When is the best time of year to run a report?
Do I need to already be an S Corp to purchase this report?
How long do I have to complete the survey?
How does the Reasonable Compensation Study and Report work?
Can I speak on the phone/Zoom with Jamie or someone else on your team?
I have questions about being an S Corp, can you help me?
What if I’m unsatisfied with my purchase?
A Real-Life Case Study*
Laticia, the owner of Laticia’s Nail Salon, had a gut feeling that $40,500 was a reasonable salary for her. She didn't have any evidence to support it, but her accountant also agreed, and she didn't think anyone would check anyway.
Unfortunately, despite being correct, she faced months of stress and expensive accountant fees when the IRS audited her. This is an example of the danger of the "set it and forget it" approach to Reasonable Compensation.
When the IRS selected Laticia’s Nail Salon for an audit, they looked at Laticia’s Reasonable Compensation and calculated it to be $67,000, which would cost her $10,000 in taxes, penalties, and interest.
Her new accountant ran a compensation report that determined her reasonable compensation to be $41,833 and successfully argued with the IRS based on data and facts.
Laticia learned that relying on gut feelings and honest intentions was not enough, and documenting her figures with facts from a credible source would have saved her a lot of stress, time, and money.
*Identifying details have been changed for privacy purposes.