How Much To Pay Yourself | Reasonable Compensation Myths
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- Опубліковано 16 лис 2024
- In this video I discuss Reasonable Compensation. If you haven’t heard that term before, reasonable compensation is the amount of wages you as the business owner should be paying yourself for services that you provide to your business. In this video I cover:
Why is IRS concerned about Reasonable Compensation?
Why is it important to pay yourself Reasonable Compensation?
How does the Tax Code and IRS define Reasonable Compensation?
What you should do to determine reasonable compensation for your business?
I also bust the following myths:
(a) Your reasonable compensation should be based on your business profitability
(b) Your reasonable compensation should always be more than the distributions you take
(c) You have to take reasonable compensation even if your business isn’t profitable
(d) You must take reasonable compensation even if you don’t take money out of the business
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#reasonablecompensation #audit #scorp
I have nearly begged every accountant I've ever had to help explain these things to me. Thank you so much! Your videos are so, so helpful.
I had no idea about myth 2! I thought RC always had to be more than distributions!
Thank you sir, it is a very interesting video. But in this video you provide an example of 100k and 500k profit saying that it shouldn't influence a reasonable compensation amount. But the real question is, what to do if my company earns much less than an average salary in my sphere. For example 40k profit. Can I make myself a payroll of 20k or it's too small sum of money?
Fantastic work. 🎉thank you I enjoy all your videos and you do an excellent job of explaining the concepts
Hi
Can you estimate amount of reasonable compensation for a pharmacist ?
Hey thanks for the video. Would you mind to share which payroll company will be good for single employee S Corporation to take own reasonable salary with low expense. The payroll company can do everything like send money to state, federal, social security, and Medicaid etc. Also, payroll company can send me W2 as well. So, I may only responsible only to tax file end of the year without worrying. Also, what form I need to fill up to be S corporation for Pennsylvania. Thanks again.
You’re welcome. I like using Quickbooks Payroll when also using Quickbooks Online. If not using Quickbooks online then a company like Gusto is a great alternative. Expect to pay about $50/month.
In PA you don’t need to file any S Corp election paperwork. You just need to elect S Corp status at the federal level.
@NaviMarajCPA do you know if NY os the same as PA for a similar scenario? Thanks.
Enjoyed this thoroughly. I know you favor Intuit, however I'm considering going with ADP. Would your course still work for me? Thanks.
Thanks for the feedback! Yes, course will work fine for you if you use a different payroll provider.
Thank you!!
Would using the department of labors average salary for that job/industry work? I understand that reasonable comp is extremely subjective but what would trigger an audit/investigation by the irs if it’s so subjective? To my knowledge they don’t know your experience what you do etc I’m wondering if there’s certain metrics they look at before they start looking more in depth?
I think using BLS.gov could be a good resource. Then thinking about your week/year and pulling data from BLS.gov for not only the thing you specialize in, but also the other tasks such as janitor, admin, sales, marketing, etc.
You’re right though, all they have is the numbers in the tax return as a starting point to decide whether or not to audit you. I believe they look at line 7 (officer compensation) of your 1120S and compare it to your distributions (Schedule M-2 and also on line 7) taken to start the process of if this is something we should inquire about.
Are federal taxes taxed using the 15-T publication chart for an S corp? Or is there a fixed federal tax rate used to tax the distribution and from the payroll portion?
When you’re running your own payroll, you can withhold as much federal or state tax as you want from your pay. Distributions are also subject to federal and state income tax but not run though payroll. Typically, distributions are taken by transferring money from business checking to a personal account using online banking. You can make estimated tax payments to account for any income tax withholding shortfalls. Hope this makes sense.
If I don't take all of the remaining distribution at the end of the year, can I use that money for a different purpose to save on federal taxes? Say I do 60% salary, 30% distribution. Can I use the 10% for something else? If so what are the options there. Thanks in advance.
The remaining 10% is still subject to federal and state income taxes even if you don’t distribute it. You can’t take the 10%, invest in a commercial building and avoid paying the tax. It doesn’t work that way but I get that question a lot.
So say the business made 100,000 and the reasonable compensation is 50,000 and the distribution is 30,000. The remaining 20,000 is it taxed as self-employment income or not?
With an S Corp, the $50k reasonable compensation is subject to social security, Medicare, other misc payroll taxes and income tax. The remaining $50k is subject to income taxes regardless if you distribute the funds or not.
Can I pay myself commission based on amount of work performed in previous month?
For example: I billed my client $4k of services for the previous month and I pay myself 75% or $3k. In slower months that would be a lot less.
Reasonable based on my accountant is based on corp profits first. If you have 100k of net income in the corp and your goal is to take the corp to zero, my accountant says "reasonable" is about 50%. So you payroll 50k and do a distribution for the other 50k / 50%. Reasonable is a vague term. The 100k in corp net income is after all expenses including funding of retirement accts, etc.
I've had other years where payroll is about 45% as well.
What if you just didn't know about the SCorp election and you filed years as an LLC? How do you change this and where do I report other 1099 NEC contractors' pay working for me on this form?
You can go back 3 years & 75 days under IRS Rev. Proc. 2013-30 but only if you have articles of incorporation starting then.
@@ArmandoMartinez-nf9ir I Do Have them starting in August 2021. Do I amend those tax years that I have already completed with SCorp election?
I have a full time job at 100k, and a part time LLC that was a partnership last few years and now a SMLLC. I elected to be a S Corp but didn't make nearly as much as I thought I was going to. 12k in net income. What should I do?oh and I totally wiffed on doing payroll and just took the 12k out . I am sick over this
What did you end up doing? I'm in a similar boat!
How does this work with a C corp? If the company is even more profitable year after year why can't the owner pay his employees and himself for a job well done? In the way of bonuses, commissions, profit sharing? Is that possible? What if we write up a compensation package explaining this?