Lower Your Taxes - BIG TIME! 2017-2018 Edition: Wealth Building, Tax Reduction Secrets from an IRS Insider (Lower Your Taxes Big Time) by Botkin Sandy
Author:Botkin, Sandy [Botkin, Sandy]
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2016-12-08T16:00:00+00:00
What Is a “Reasonable” Salary?
Good question! The IRS defines “reasonable compensation” as what would ordinarily be paid for like services, by like enterprises (similar in size and business to your own), under like circumstances. 8 This is generally interpreted to mean “what you would pay an outside agency or person to do the same duties.”
There are a lot of factors that determine what is reasonable, such as:
• Actual services performed
• Responsibilities involved
• Time spent
• Size and complexity of the business
• Prevailing economic conditions
• Compensation paid by comparable firms for comparable services
• Salary paid to company officers in prior years
Sadly, as you can see, the factors are not very clear. I would highly recommend that you check with a good accountant or tax attorney when setting any salaries and bonuses for you. Get comparable salaries from government publications.
Author’s note: Most people want a nice flat number or a flat percentage of income as the litmus test for reasonable compensation. Sadly, I can’t give a number, because it varies from business to business and according to a number of factors. However, from the many cases that I have read, I have found that in most cases where salary paid was approximately between 40 percent and 60 percent of net income, this amount has been deemed reasonable. 9 Also, if there are unrelated minority stockholders, if they approve some compensation for the officers who are also majority stockholders, courts tend to give weight to this approval from the Board of Directors or stockholders, since the minority stockholders would then be receiving less in dividends. 10 The bottom line: check with a good accountant and tax lawyer about setting any salaries and bonuses in order to minimize your salary and minimize your self-employment tax. Here, an ounce of prevention is worth a bundle in wealth!
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