4 ms·
The "reasonableness" test is bullshit also. Last I checked, a salary is a predetermined amount of money that will be paid over a predetermined amount of time,
by jcnnghm 16y ago
The "reasonableness" test is bullshit also. Last I checked, a salary is a predetermined amount of money that will be paid over a predetermined amount of time, for a predetermined amount of work. A reasonable salary for the owner of an S Corp should be whatever the company can guarantee they will be paid over the course of the next twelve months, or, in retrospect, their lowest monthly cash income over the last twelve months, times twelve, or a comparable employee salary, whichever is lower.
The fact of the matter is, as the owner of a company, you are at risk of not getting paid, or getting paid less than you would if you were employed somewhere else in the same position. 15% is a substantial amount of money to blow on a social program that will likely never benefit the individual paying into the system. Unless the government plans to begin compensating S corp owners that are making below a "reasonable" salary, to bring them up to a "reasonable" salary, something I also don't support, they should drop the onerous tax and allow small businesses to grow.
- bradleyland 16y agoMy sister is an accountant specializing in audits and forensic accounting. I've talked to her about this extensively. Any portion of the tax code that mentions "reasonableness" is indeed open to interpretation. The interpretation of this code is (much like criminal law), based on judicial rulings; case law. In the case of a "reasonable salary", the following stipulations apply: * The IRS will not force your corporation in to an unprofitable scenario as a result of the salary requirement; i.e., if your corporation is yielding a net loss, they will not force you to take salary, but then again, your tax issue is already solved if you have a NOL * The reasonable salary clause is targeted and applied specifically to S-corp operators who take a disproportionately large amount of their income in the form of a distribution, rather than salary There is potential for abuse with the existing tax code, but the reasonable salary requirement was created specifically to address that. Enforcement of this clause isn't intended to be applied in the context of market salaries (which is how we usually think of them), but in the context of the ratio of salary to distributions.
- tptacek 16y agoUnfortunately for S-Corp advocates on HN, the "natural" FICA exemption already stops right around the "reasonable" salary of a computer professional.