You might want to check out some services that can help, like this one: Reasonable Compensation Tool - Plans and Pricing - RCReports
Also, if you have a retirement plan, a higher salary means more contributions.
Without more details, it’s hard to say. It depends on the going rate for an agent in your area and your income level.
Koa said:
Without more details, it’s hard to say. It depends on the going rate for an agent in your area and your income level.
In my experience, agents typically make around 3-5% commission, so that’s the ballpark for a reasonable income.
Realistic income for an agent is basically net business income after expenses. Fight me on this, glad I’m not your examiner.
Ember said:
Realistic income for an agent is basically net business income after expenses. Fight me on this, glad I’m not your examiner.
Yes! For a lot of small S Corp setups, salary is just net business expenses. It’s just the nature of services, right?
@Remy
This reasoning could apply to many single-member S Corps, but guidance and case law say otherwise. You can definitely go below 100%.
Zen said:
@Remy
This reasoning could apply to many single-member S Corps, but guidance and case law say otherwise. You can definitely go below 100%.
One-person S Corps don’t always mean one person does all the work. Look at the Watson case where there were employees, which changes things.
@Dallas
True, my example was a single member with no employees, but you’re right that case law doesn’t always suggest 100%.
Zen said:
@Dallas
True, my example was a single member with no employees, but you’re right that case law doesn’t always suggest 100%.
Right. But if one person generates $500,000 after expenses, what’s the fair market value of their services?
@Dallas
Good point. Generally, courts look at salaries for people with similar experience, not always based on exact earnings.
Zen said:
@Dallas
Good point. Generally, courts look at salaries for people with similar experience, not always based on exact earnings.
That’s usually practical, but sometimes specific cases need more than just a percentage standard.
@Dallas
Agreed. Look at local averages if you’re preparing for an audit. Not saying percentages can’t work but this gives OP a bit more leeway.
Ember said:
Realistic income for an agent is basically net business income after expenses. Fight me on this, glad I’m not your examiner.
That’s not accurate, and it shows lack of audit experience or knowledge of case law.
Ember said:
@Noor
Care to back that up with some citations?
Sure, here’s a link that explains more: https://www.reddit.com/r/tax/s/Bw5D7y6gOE
Cases like Watson and Glass Blocks Unlimited are good references. Watson showed how low percentages are sometimes enough, while Glass Blocks Unlimited had more to do with record-keeping failures.
@Noor
Your most detailed post here yet … much appreciated. I wouldn’t go that aggressive but definitely worth considering.
Ember said:
@Noor
Your most detailed post here yet … much appreciated. I wouldn’t go that aggressive but definitely worth considering.
Thanks! I had time today, haha. Interesting to see the close watch here, though.
If you’re the only one generating profit, then almost the entire profit would count as reasonable comp, but if you have staff or other sources, it’s different. You might get away with a salary at least as much as the Social Security wage limit.
No way would 100k be okay. Most agents file on schedule C; it’s all personal service. If you want to avoid trouble, look at at least 250k. Also, the S Corp adds payroll tax and paperwork that can be a hassle.