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The IRS has some guidelines that they use to decide what is “reasonable” but they don’t give out whatever actual formula or process they use to determine this.
by iamnothere 1y ago
The IRS has some guidelines that they use to decide what is “reasonable” but they don’t give out whatever actual formula or process they use to determine this. It’s supposed to be based on industry averages (more or less) but in reality it’s hard to determine what exactly that means. Generally you are “safe” paying in an industry average range, but if outside that range you need legal and accounting support to back up your own assessment.
- JumpCrisscross 1y ago> you are “safe” paying in an industry average range, but if outside that range you need legal and accounting support to back up your own assessment What? The IRS doesn’t regulate wages. They just care about getting their money. If I pay you $10bn a year to yell at my cat, the IRS is fine so long as I pay payroll and you income taxes.
- iamnothere 1y agoActually as a nonprofit you are required to pay at or below a reasonable wage/salary or you may face sanctions: https://www.nolo.com/legal-encyclopedia/how-determine-reasonable-compensation-nonprofit-key-employees.html https://www.nolo.com/legal-encyclopedia/how-determine-reason... Similarly as an S Corp (maybe other corp types too) then officers must take at or above a reasonable wage/salary to limit the tax advantage: https://www.irs.gov/pub/irs-news/fs-08-25.pdf https://www.irs.gov/pub/irs-news/fs-08-25.pdf This is intended to prevent people from, for instance, setting up a “nonprofit” where they just funnel all gains into their pocket while gaining all the other tax benefits of being a nonprofit. You can’t overpay people, you can’t engage in transactions where you intentionally overpay a supplier for materials/services and then they compensate you for the extra amount, etc.