I hope you have managed to stay safe and well! We focus on resolving both personal and business customers’ Tax Issues in Prince William County, and throughout the lower Northern Virginia area.

Are you an employee-owner of a corporation (or an LLC that filed IRS Form 2553 and elected to be taxed as a Subchapter S Corporation)? If so, hopefully you are aware of the requirement to remit to yourself (through payroll), what the Internal Revenue Code (IRC) terms – Reasonable Compensation. Unfortunately, what the IRC does not specify is exactly what it is or how to calculate this amount.

However, adjudicated court cases through the U.S. Tax Court System have provided some valuable insight on the subject.  Through these court cases, practitioners (and the rest of the public) have been able to determine that Reasonable Compensation is somewhere between 38% and 43% of Net Income.  Of course, this figure is calculated prior to the deduction for payroll to the employee-owner(s) from bottom-line net profit. The good news is if you haven’t paid yourself through payroll, and you’re required to do so, you still have time (employee-owners do not have to process payroll on a set schedule nor a minimum amount of times during the fiscal year).  The bad news is you’re quickly running out of time, to:  1) Calculate and estimate your net income from your business for the year; 2) determine if you want to mitigate the resulting amount; and 3) process payroll for yourself for a “reasonable” amount.

Even if you don’t currently have a payroll provider, you can set one up fairly quickly or you can calculate the payroll yourself (a number of sources exist on the web to assist you – just type Calculate my paycheck into your browser).  However, the latter option still requires you to register with the state and/or your locality, and you need to remit the tax amounts withheld (trust funds), on the proper time schedule, as well as file the necessary payroll returns with the proper regulatory bodies.  What’s the risk of not paying yourself a reasonable salary? The IRS contacting you and declaring that all of your net income should have been payroll (this has been shown in adjudicated tax court cases), now you have to fight the case, and you could be subject to back payroll taxes, which lead to failure to file, failure to deposit, and failure to pay penalties.

If you feel as though you need help in this area, or would like a consultation, please feel free to contact us. We’d be more than happy to assist you with this matter. https://brtaxaccountant.com/