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Reasonable Compensation Reporting: Part 2
March 24, 2023 •TaxPlanIQ Support team
In the first article of this two-part series, we introduced Paul Hamann of RCReports and covered how they calculate reasonable compensation reports and why those reports help taxpayers.
In part two, we will cover the risks associated with not taking reasonable comp into account, steps the accountant needs to walk through before running the reports, and an overview of a case study explaining how to run a report in RCReports.
Let’s dive in!
Risks of Bypassing Reasonable Compensation
As a business owner, if you’re paying yourself too little you can end up costing yourself more in the long run because your payroll taxes will go up.
But Paul says, by running the reports and implementing the findings, you’re bringing in audit protection. This allows you to fix problems (like paying yourself too little) and avoid penalties and interest.
Using RCReports is a value add.
While some people are surprised by the outcome of the reports, most are not. The largest issue is typically complacency and not taking the time to figure out what the number is.
Additionally, for tax advisors, it can be hard to explain to clients why you are all of the sudden making a change. However, mitigating risk is the biggest reason. Secondly, tax advisors can also receive penalties if their clients didn’t take proper reasonable comp. Overall, it can be a risk to both parties to sweep this topic under the rug.
Another potential risk of not paying yourself reasonable comp is messing with your long-term benefits like retirement and social security benefits. If you’ve been taking a minimal salary, you may be shocked to see minimal benefits available to you.
Lastly, a minor risk for s-corps includes family members. If they are considered an officer, the IRS will assume they are providing services. So, find out if that’s the case because you might have some that are titled but not giving services, you can check “officer in name only” in RCReports to document that. You’ll also want to note this in the corporate minutes and on the 1125E, as well.
Steps the Accountant Needs to Walk Through Before Running the Reports
First, you’ll want to determine if the analysis can and will be done internally or through a third-party vendor. Both Jackie and Paul recommend RCreports for this. It’s a no-brainer option and gives you one less thing you have to worry about as an accountant.
Once you decide to move forward with RCReports, you need to have appropriate data. As an accountant, you or your client can log in to input data. However, the software is built for the accountant. They will need to log in, but there are a lot of ways to gather the information.
You can print and enter the info yourself or send them a link, they’ll finish, you’ll get a notification, and you can review and make any changes.
As you or your client goes through the questionnaire in RCReports, one thing to watch out for is descriptions. Make sure the job description selected fits the tasks they are performing.
For example, a very small business should not have the owner call themselves a CEO because the wages are much higher than they should be.
Finally, Paul recommends reviewing payroll on an annual basis, at least. Rerun the report to make sure everything is appropriate.
Case Study Example
RCReports was created to be simple and intuitive to use. It’s a client-centric platform, meaning you have to add the client before you run any reports. However, once the client is added, you can run as many reports as you want.
For our case study, our client’s name is Doug Demo, and his business is Bookkeeping R Us.
First, what you will do is initiate a report, select what the report is for, select the approach you’d like to use, then select the year. You’ll then choose who sees the reports right away and if you want to be notified when the report is finished. You can add a title and/or notes to the report and choose to get a copy emailed or printed.
Then you will start the questionnaire. You’ll notice the first page is tips and information about how the numbers are calculated.
Inside the questionnaire, you’ll select the location (state), county, and hours per week (this is a great money saver for s-corp owners who work a ton of hours). Then, you’ll choose standard tasks and select the ones you do regularly. Follow by adding what you do specifically for the business.
Now you have to allocate how much time you spend in each of the categories. Then, mark your proficiency at the position (how good are you at that specific task). Start at average and go up or down if you have a reason to.
Finally, you’ll see the report. For this example, the reasonable comp was $45,277 based on 30 hours a week. The report shows how the number was reached and has supporting documentation to call out the IRS's own rules. The software then reminds you to add the report to your corporate minutes so it is clear how you got the numbers if you are challenged.
You can easily go back and make edits to your information if needed.
TaxPlanIQ and RCReports
Once you’ve run the reports, you can go into TaxPlanIQ and add or adjust the tax savings strategy based on the information you already have included for the client.
Remember, don’t run this full analysis if you haven’t been paid yet. Use your prior knowledge to make an educated guess as to what the reasonable comp will be for your client. Run the full report after you’ve gotten paid.
As a TaxPlanIQ user, you can access RCReports in our resources. If you choose to use RCReports, there are special discounts just for you!
There is an option for someone who just needs one report, but for tax advisors, there are plans with the option for unlimited reports. One is a basic plan priced at $1080/year and the other is a premium plan priced at $1500/year. The premium has additional tools like white labeling, branding, and more.
But again, if you’re with TaxPlanIQ you can have significant savings!
If you’re interested in learning more about RCReports, visit their website!
If you’re interested in learning more about TaxPlanIQ, visit our website!