Lower Your Taxes - BIG TIME! 2015 Edition: Wealth Building, Tax Reduction Secrets from an IRS Insider (Lower Your Taxes-Big Time) by Sandy Botkin

Lower Your Taxes - BIG TIME! 2015 Edition: Wealth Building, Tax Reduction Secrets from an IRS Insider (Lower Your Taxes-Big Time) by Sandy Botkin

Author:Sandy Botkin
Language: eng
Format: mobi
Publisher: McGraw-Hill Education
Published: 2014-12-29T14:00:00+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!


• This strategy is especially great for Middle America.

• S corporation salaries and bonuses are subject to self-employment tax.

• Dividends and undistributed earnings (which are treated as dividends) are not subject to self-employment tax.

• If you’re an S corporation, pay yourself as little as possible in salary, as long as it’s reasonable, and as much as possible in dividends.

• Use a good accountant and/or tax attorney to help you establish what a minimum reasonable salary should be. Failure to do this would be a hazard to your wealth.


1. Section 1374(a) of the IRC. This deals with built-in gains where you have accumulated earnings and profits for a regular corporation. If you started as an S corporation and never operated this entity as a regular corporation, this is not an issue.

2. Section 1363(a) of the IRC.

3. Section 1366 of the IRC.

4. Section 1366 of the IRC.

5. Section 1402(a) of the IRC.

6. Revenue Ruling 74-44, 1974-1 CB 287.

7. Joseph Radtke v. United States, 895 F.2d 1196 (7th Cir. 1990).

8. Section 1.162-7(b) of the ITR.

9. Hamilton and Co., T.C. Memo 1959-153.

10. Gilles Frozen Custard, Inc., T.C. Memo 1970-73; William J. Hertz, T.C. Memo 1998-210.


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