Avoid an IRS Nightmare: Why S Corp Owners Need to Take Reasonable Pay

Owning an S corporation can be a tax-savvy dream come true. Pass-through taxation avoids double taxation, and profits flow directly to shareholders. But this dream can quickly turn into a nightmare if you don't play by the IRS's rules. One crucial rule: S corp shareholders must receive reasonable compensation for services rendered to the company.

By not taking reasonable compensation, the IRS can make life extremely miserable by reclassifying distributions as payroll, and then not only do you have possibly thousands owed in back taxes, but the penalties and interest quickly add up. This can lead to potentially TENS of thousands in total taxes, penalties and interest. Not to mention you may have amended payroll tax returns and W2’s to file, as well as amended income tax returns. It can be a harrowing mess and an exorbitant cost.

Here's why taking reasonable compensation is non-negotiable for S corp shareholders:

1. The IRS is Watching: Uncle Sam doesn't appreciate being played. Since the passage of the Inflation Reduction Act, the IRS was given $80 billion to beef up enforcement. One of their top priorities is going after the low hanging fruit, which includes S corporation shareholders who are not taking “reasonable compensation”. If you pay yourself suspiciously low wages while taking hefty profits as distributions, the IRS might suspect you're trying to avoid employment taxes. This can trigger an audit, and trust me, explaining your "strategic pay plan" is not fun.
2. What's "Reasonable" Anyway? Factors like your job duties, industry standards, and similar businesses' compensation levels come into play. Generally, your salary should reflect the time and effort you put into running the business. Here are a couple of good articles on the subject:https://smallbiztrends.com/2023/03/s-corp-election.htmlhttps://www.cpapracticeadvisor.com/2022/03/16/s-corp-salary-guidelines-what-is-reasonable-compensation/48490/
3. Avoiding the Grey Area: Don't fall into the trap of paying yourself enough just to take “something”. This puts you in a constant state of anxiety and leaves you walking a tightrope with the IRS.

Remember, taking reasonable compensation isn't just about avoiding the IRS's wrath. It's about setting yourself up for long-term financial security and peace of mind. So, put down the dice, ditch the penny-pinching strategy, and prioritize fair compensation. Your future self will thank you.

Don't let "reasonable compensation" be a mystery. Get informed, make smart financial decisions, and enjoy the sweet benefits of S corp ownership – without playing games with the IRS. “But how do I do that?”, you ask. Fortunately, there is a solution: a comprehensive reasonable compensation report that is produced in minutes and is UNDEFEATED in IRS audits. That’s right: this report has ALWAYS beaten the IRS! If you (or a fellow S corp shareholder you may know) want to protect yourself and save THOUSANDS in penalties and interest, contact me today by scheduling a quick 15 minute call here: https://calendly.com/mmoran-6/reasonable-compensation-call. Don’t be a victim of the new IRS initiative – protect yourself TODAY with this bullet proof asset in your corner.