Spencer Accounting Group, LLC - Tax Planning and Preparation Services - West Allis, Milwaukee, Brookfield, Waukesha, United States and Saudi Arabia
  • Home
  • Pricing
    • Rush & Cancellation Policy
  • Let's Chat
  • Home
  • Pricing
    • Rush & Cancellation Policy
  • Let's Chat

FREE Tax Tips and Updates

Browse our blog for helpful tax planning and preparation information.

​Don’t Let the IRS Set Your S Corporation Salary

11/10/2020

0 Comments

 
Picture
 
You likely formed an S corporation to save on self-employment taxes. 
 
If so, is your S corporation salary

  • nonexistent?
  • too low?
  • too high?
  • just right?
 
Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty. 
 
Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years. 
 
Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.
 
Getting to the Number
 
The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”
 
The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

​The two approaches Spencer Accounting Group will likely use based on your business are the: ​

Market Approach- The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.
Cost Approach -The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Health Insurance
 
The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.
 
Pension
 
The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.
 
Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.
 
Section 199A Deduction
 
The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040. ​

Don't hesitate to contact us if you need help determining reasonable compensation.
0 Comments



Leave a Reply.

    We're Here to Help

    Get advice from our experienced network of financial managers. 
    ​

    If you Value our Blog, We have an ask.

    We spend hours researching data to help you understand your finances and taxes, including historical context, issues, and solutions. Our goal is to empower people to improve  their relationship with money. ​Please consider a $3 donation today.

    Tax Plan Video

    Important Disclosures


    Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.

    ​
    To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
    ​
    These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

    GET STARTED

    Author

    Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion.  Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.

    Keana founded this website and decided and created this blog page to offer a space for those seeking knowledge to understand, however not to be confused with advice or planning strategies.

    RSS Feed

    Accounting Services
    Tax Preparation
    Picture
    Picture
Home
Net30 Account Info
Privacy Policy
Contact Us

Picture
Picture
Picture
Copyright 2021 ALL RIGHTS RESERVED.
Photo used under Creative Commons from verchmarco