Determining a Reasonable Salary for Your S-Corp: What to Consider on a $68K Income
As a business owner, especially when managing an S-corporation, determining a reasonable salary is an essential aspect of setting up payroll. This topic can often lead to confusion and subsequent questions, particularly regarding what constitutes a fair salary within the context of your business’s income.
A Case Study: $68K Net Income Scenario
Imagine you’ve successfully launched your S-corp and are now faced with the task of payroll. With a net income of $68,000, it’s vital to establish a salary that reflects your professional expertise and aligns with industry standards.
Recently, a question arose from a fellow entrepreneur navigating this process. After consulting with their accountant, they were advised to set a minimum salary of $20,000. However, this figure raised eyebrows, especially when considering that the average salary for their profession, copywriting, hovers around $63,000 according to Glassdoor data.
Understanding Reasonable Salary Guidelines
The Internal Revenue Service (IRS) emphasizes that S-corp owners must pay themselves a “reasonable salary” based on the work performed. This means that the salary should reflect what similar employees earn for the same role within the industry. Factors such as experience, skill level, and geographical location all play a pivotal role in determining what qualifies as reasonable.
In the scenario mentioned, although the accountant suggested $20,000, it’s important to evaluate how that number compares with prevalent salary data. Given that the industry average is around $63,000, aiming significantly lower than this benchmark could attract unwanted attention from the IRS, as it may be perceived as an attempt to minimize tax liabilities.
The Takeaway: Striking a Balance
When establishing your salary, aim for a figure that not only meets IRS expectations but also reflects the value you’re bringing to your S-corp. Assess both your business’s financial health and industry standards to arrive at a fair compensation package.
In conclusion, while setting your salary, don’t hesitate to consult with your accountant but always ensure that the final decision aligns with common salary ranges in your field. By doing this, you safeguard your business and ensure compliance with IRS regulations while still compensating yourself in a manner that reflects your contributions. Happy business building!
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Determining a “reasonable salary” for an S-Corp owner is a crucial step to ensure compliance with IRS regulations and to avoid potential issues down the line. Your accountant’s suggestion of a $20K salary may seem low compared to industry standards, so let’s dive into a few factors that can help you formulate a more accurate number.
Understanding Reasonable Salary
The IRS requires S-Corp owners to pay themselves a reasonable salary for the services they provide to the company before taking any distributions. A reasonable salary is defined as the amount that would ordinarily be paid for similar services in the market.
Factors to Consider
Industry Standards: As you mentioned, the average salary for a copywriter according to platforms like Glassdoor is around $63K. It’s important to consider your experience, the complexity of the work, and your geographic location. Those factors can significantly influence what constitutes a reasonable salary.
Time and Effort: Evaluate how much time you spend working for your S-Corp. If you’re dedicating significant hours each week to your business operations, a higher salary is justified. For example, if you’re working full-time as a copywriter and generating significant work output, a salary close to the industry average may be more appropriate.
Paying Yourself Too Low: Paying yourself too low can raise red flags with the IRS. They might expect you to distribute your profits in a way that reflects a fair compensation for your contributions, leading to potential audits and penalties.
Input from Multiple Sources: Take a comprehensive look at pay scales in your field, and consider reaching out to industry peers or using multiple salary surveys to ensure that your interpretation of a “reasonable salary” aligns with broader market standards.
Future Growth and Benefits: Consider how your salary fits into your long-term financial strategy. A higher salary allows you to take advantage of benefits such as higher retirement contributions, which can significantly impact you down the line.
Practical Steps
Market Research: Aside from Glassdoor, look into other salary research sites (such as PayScale or Indeed) to gather a broader range of salary data for copywriters in your area.
Consult with Your Accountant Again: Share your findings regarding industry standards with your accountant and ask for their advice on setting a salary figure that balances both IRS compliance and fair market compensation.
Reassess Periodically: Salaries aren’t static. Reassess your compensation on an annual basis, adjusting for changes in your role, business income, or market standards.
Recommended Salary Range
Given your annual net income of $68K and the average salary for a copywriter being around $63K, it might be prudent to set a salary in the range of $45K to $55K. This figure not only provides you with a reasonable salary that reflects your profession but also leaves room for distributions while remaining compliant with IRS guidelines.
Ultimately, it’s about ensuring that you are compensated fairly while also adhering to the regulations that govern your S-Corp. That way, you can confidently build your business without fear of financial missteps.