Any business owner will tell you that there are definitely a lot of perks to owning your own business: set your own hours, benefit directly from the time and attention you put into a business, and create your own income. And so many will also immediately add that it does come with the downside of stress over producing your own income, managing staff, having to tend to state licenses, bookkeeping, HR requirements, etc. One area that doesn’t often hit the top of that list but definitely should is ensuring the owner is paying themself what is considered a “fair” wage in the eyes of the government.

“Wait, the government can have a say in what I pay myself from my own business???” As Marge Gunderson said in Fargo, “Oh, you betcha’ yeah.”

Until the last few years, the “reasonable compensation” topic wasn’t one that was tossed around prevalently in the tax world. Recently, however, most tax world-related publications and conferences have at least one featured article or seminar on reasonable compensation, how it is a renewed area of focus with the IRS, and the downfall of not tending to it responsibly as a tax professional and/or business owner.

First, for business owners with any type of entity beyond a sole proprietorship, it is essential to understand that you must, by law, pay yourself a “fair and reasonable wage” if your business generates the cash flow to do so. The reason for this demand comes down to the taxability of the money you receive from your business. Distributions do not have payroll taxes assessed for Medicare and Social Security, while W-2 sourced pay does. It would be extremely attractive to classify all income as distributions rather than salary to save on that type of tax assessment.

There are downfalls to not claiming a proper wage from the individual’s standpoint:

1. Lack of consistent income reported for the purpose of securing personal credit.
2. Lack of income history for Social Security benefits.
3. Exposure to the IRS reclassifying income initially claimed as distributions to W-2, then levying penalties, fines, and interest accordingly.

Nobody wants this kind of short-term or long-term trouble!

For tax professionals, we have a significant amount of exposure when it comes to representing our clients and handling their financial information. According to the IRS’ Circular 230, the publication that outlines the responsibilities of tax professionals, there are four initial requirements someone must have before he/she can be admitted as a representative to practice:

1. Good character,
2. Good reputation,
3. Necessary qualifications to enable the representative to provide to persons valuable service, and
4. Competency to advise and assist persons in presenting their cases.

Suppose we do not take the initiative to look out for our client’s financial interests, their business’ financial actions, and the overall picture we present on their annual income tax returns. Are we providing a valuable service? If we aren’t doing those things, we may be able to claim we are competent to advise and assist our clients, but are we truly following through with the commitment? Reasonable compensation and the impacts that flow through from the business to the taxpayer individually is a HUGE red flag topic right now. If you have not had conversations with your clients about how they are paying themselves from their business in the past, the time to start is now!

One of the services Golden Lion Tax Solutions provides is the compilation of a Reasonable Compensation Report for business owners. This report identifies a “fair and reasonable wage figure” for each owner according to duties, tasks, and responsibilities within the organization and the owner’s proficiency level with each. Because the report is compiled using the same data the IRS uses when auditing reasonable compensation, it is 100% defendable should an audit occur.

If you are a business owner with concerns about your salary level, or if you are a tax professional and are concerned about the level of compensation your clients are paying themselves, reach out to the team at Golden Lion Tax Solutions. With a quick 15-minute assessment of each officer/owner/shareholder’s roles, we can produce a dependable and thorough report within one business day that you can “take to the bank.”

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Trust. Protection. Wisdom.

Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.

For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.