There are a range of opinions about reasonable comp and no real guidance from the IRS about what it might be. A 50/50 split is not a safe harbor, but some feel it's unlikely to be challenged. The counter argument is that the market has determined your comp to be 2X instead of X, and there's really nothing else in the business to account for the difference.Funny you mention radiologist. I'm actually going to be providing support for radiology applications and the rate I'm charging will be over double what an analyst (or even a consultant which I was previously) will be paid. Should that not be reasonable enough for half of that amount to be for distributions? I thought reasonable is what others in my similar position will get paid for and not what I'm charging for?
The point is that if all of the income of the S-Corp comes from your personal services then it may not be "reasonable" to set your compensation any lower than that income, which would leave no room for distributions that avoided FICA, and no reason for an S-Corp in the first place.
For example, an S-Corp radiologist reading X-rays on a laptop is different than the S-Corp owner of a widget-making machine who sells them online. In the latter case the owner might be better able to justify a lower salary since they're really just boxing up widgets and shipping them, with the machine creating much of the income. Different for the radiologist who is providing 100% of the services from their personal labor.
Other reasons that an S-Corp might not be the best choice are that your Section 199a 20% QBI deduction will be less, because it's based on the S-Corp's net income (which is reduced by your salary). Without the S election you'd have more business income on which to base this deduction. Similarly, your allowable retirement contributions would likely by higher without the S, because they would be based on the LLC's income (without the deduction for your salary), rather than based on your salary alone, as with an S-Corp.
Statistics: Posted by MP123 — Mon Jan 13, 2025 5:51 pm — Replies 11 — Views 543