Recent discussions have brought the financial practices of Joe and Jill Biden into the spotlight, particularly their use of S corporations to report earnings from speaking engagements and book deals. In 2017, about 2% of their earnings were reported as wages; in 2018, this figure rose to 13%. This has led to questions about whether their approach to compensation is appropriate or even legal. In this blog post, we’ll examine the concept of reasonable compensation for S corp owners and guide them on how to stay compliant. [Source]
Understanding Reasonable S Corp Compensation
It’s crucial to note that the Bidens’ approach to S corp compensation is not necessarily an instance of tax fraud. Notably, “reasonable compensation” regarding S corp owners is a term of art not expressly mentioned in the Tax Code and Regulations.
Determining reasonable compensation for S corp owners is a complex process that depends on several factors. These factors help establish an appropriate salary level for business owners, considering their contributions to the company and industry standards. The factors to consider include:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula for determining compensation
- Amounts paid out as salary compared with the amount distributed as profits
Staying Compliant as an S corp Owner
For S corp owners or those considering becoming one, getting the compensation number correct for estimating taxes and remaining compliant is essential. By carefully evaluating the factors listed above, S corp owners can determine a reasonable salary that reflects their contributions to the business and aligns with industry norms.
To ensure compliance, it’s advisable to consult a tax professional who can help you navigate the complexities of S corp compensation. They can offer guidance tailored to your business and circumstances, helping you avoid potential pitfalls and stay on the right side of the law.
The case of Joe and Jill Biden’s S corp compensation serves as a reminder of the importance of understanding reasonable compensation for business owners. While their approach may not be tax fraud, it highlights the need for S corp owners to thoroughly evaluate their compensation and ensure they comply with the rules. By considering the various factors determining reasonable compensation and seeking professional guidance, S corp owners can confidently support their salary, whatever the amount may be.