How to determine your Reasonable Compensation figure

We offer our clients a Reasonable Compensation Study to accurately and document services provided to your business.  Reasonable compensation is the salary or wages that you, a shareholder of an C-Corp, S-Corp or LLC pay yourself for the work you perform for your company.  We have the tools to accurately determine your Reasonable Compensation figure.

The IRS requires that all shareholders of S Corps who perform services for their company pay themselves Reasonable Compensation, and it needs to be paid prior to taking any distributions.

There are two ways to think about Reasonable Compensation:

  1. Replacement Cost: What would it cost your company to pay another person(s) to provide all the services you currently provide?
  2. Fair Market Value: What would other businesses in your community pay you for the services you currently provide to your company?

The IRS has updated its guidelines. It is more important than ever that you research and document how you determined your Reasonable Compensation figure.

We have tools available to make it easy for you to accurately determine your Reasonable Compensation figure.  A Reasonable Compensation Report is an independent unbiased report that establishes your Reasonable Compensation using criteria outlined by the IRS and Courts and provides a defensible position to an IRS challenge.

The best time to establish your Reasonable Compensation figure is now, before an IRS examination.  Reasonable Compensation has become an IRS hot button and we have been told to expect an increase in examinations of S Corps:

  • S Corp audits up 14% in 2015
  • June 2016: IRS announces it is focusing more resources on S-Corps.

A Reasonable Compensation challenge can be costly.  Typically, taxes, penalty, and interest are more than double the original tax that would have been owed – plus costs for amending returns.

Learn more about what the IRS says about reasonable compensation.

Contact us now to get started taking the necessary steps to protect yourself on this issue.

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Got Questions?

Contact us to see how we can help you and your business.

Geslin Tukey LTD

5775 Wayzata Boulevard, Suite 700 Minneapolis, MN 55416