As a part of this blog, we like to give you a heads-up on some of the things the IRS is focusing on in an attempt to collect taxes. Recently, the IRS has been targeting business owners through officer wages. If you own a corporation, the IRS says that each officer is to be paid a “reasonable wage” for services rendered—this is an officer wage. This wage is to be paid the same way you pay employees—with taxes withheld and a W-2 form issued at the end of the year.
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The biggest problem people are having is determining what a reasonable wage is. So let’s talk about how you figure a reasonable wage. It can be tricky. Although the IRS has many charts in its code to monitor different tax situations, there is not an official chart for determining reasonable wages. This actually makes sense because there are so many different variables involved that it would no doubt be one big, complicated chart. However, on the U.S. Department of Labor’s website, there is information about many types of jobs and what the average wage is per hour and per year for each. They even have it broken down by state. This is a good place to start. Go to the Department of Labor, Bureau of Labor Statistics at www.bls.gov/data and click on “Data Bases and Tables.” There you can search your type of job by state. Many states even have this information on their own
Department of Unemployment website. Another thing you can do is research how much you could earn if you worked doing the same thing for someone else in your area. If you could earn $20 per hour working for someone else in your city or county, you can use that figure to calculate a reasonable wage.
Because this process is so subjective, here are two things we recommend you do when figuring a reasonable wage.
- Think about what you do for your company and then research how much you would get paid to do that same thing if you worked for someone else.
- How much does your company make per year. It is not reasonable to pay yourself more than your company earns.
The IRS is cracking down on companies that are not paying officer wages. If you are one of those companies, we suggest you talk to your tax professional and see what would be the best way for you to get compliant.
There are also a lot of other policies you need to make sure you are following correctly. We have a great CD set that can teach you how to make sure you and your business are being compliant with the IRS. Visit http://avoidbeingaudited.com/products.html to learn more!
Master Your Taxes 
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Hi Robin!
Thanks for your comment and compliments! We are here to help people with their taxes, and we are so glad you are finding some from our resources. We have a whole website dedicated to this as well. Check it out http://www.avoidbeingaudited.com.
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..Question What is a Reasonable Salary for an S Corporation Officer?Some companies attempt to avoid paying employment taxes by minimizing the salaries and bonuses they pay to corporate officers and instead considering payments as loan payments or payments of personal expenses. The IRS guidelines suggest you look at the following factors to determine reasonable salaries for your corporate officers . .Using Comparable Salaries.Another way to determine a reasonable salary for corporate officers is to look at what other companies of similar size and type pay for such services.
Thanks for the great question! The reason this is such a difficult questions is because there are so many factors into coming up with a Reasonable Salary for an S Corporation Officer. Yes, the main reason business owners become an S Corporation is to save on self employment tax. I look at three things when determining a Reasonable Salary. 1) How profitable is the business. You are entitled to received distributions as a stock holder that are not subject to self employment tax. This makes it unreasonable for you to take in salary more than your company makes or 100% of your income as a salary. 2) What other professionals in your area are making. You can go to the following website and look up the average wage in your state. http://www.bls.gov/oes/2008/may/oes_nat.htm#b00-0000. Replace the “nat” with your state abbreviation. 3) What are you paying other employees that are doing the same services for your company that you are. The IRS does not feel it is reasonable for you to pay an employee that is doing the same work as you more than you pay yourself.
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