Reasonable Compensation Report

At Cerebral, our mission is to ensure that our clients stay compliant with financial and tax regulations. One vital but frequently overlooked element is accurately determining the compensation for company owners and executives. That’s precisely why we offer our clients a Reasonable Compensation Report

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What is a Reasonable Compensation Report?

Reasonable compensation refers to the fair and justifiable amount that an individual should receive for their role within a company. The IRS mandates that all shareholders of S Corps, who actively contribute their services to the company, must pay themselves Reasonable Compensation before considering any distributions. To establish this compensation, it’s vital to evaluate your contributions to your S Corp comprehensively.

A Reasonable Compensation Report is a document that determines your Reasonable Compensation in alignment with IRS criteria. This report serves as a robust defense in the face of any IRS scrutiny and is a valuable tool for strategic planning.

How to Request an RC Report?

To request your customized Reasonable Compensation Report, simply click the link below and complete a brief survey.

Your report will be crafted based on the information you provide in the survey, ensuring its precision and relevance.

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Download a sample report

Frequently Asked Questions

1. What is the refund policy?

There are no refunds after you have completed the questionnaire and a draft or final report has been issued to you. The information input by you into the questionnaire is at your discretion and is for management purposes only.

2. Can I run reports for previous years?

Yes, our wage database includes wages from 2001 to present.

3. How Large a company can Cerebral Tax Advisors handle?

The accuracy of our data sets decreases beyond 25 million in adjusted gross profit and/or 250 full-time employees
Adjusted gross profit (AGP) is the amount of money a business makes after subtracting the direct costs of producing its goods or services. Direct costs are those that can be directly attributed to the production of a product or service, such as the cost of materials, labor, and factory overhead.

AGP is similar to gross profit, but it is calculated differently. Gross profit is the amount of money a business makes after subtracting the cost of goods sold (COGS) from its revenue. COGS includes the direct costs of producing goods, but it also includes indirect costs, such as the cost of shipping and handling.

The main difference between AGP and gross profit is that AGP does not include indirect costs. This makes AGP a more accurate measure of a business’s profitability, as it only includes the costs that are directly related to producing its products or services.

4. How do I remove the DRAFT Stamp?

To remove the “Draft” stamp from a report, you can manually lock the report. To do this, open the report and click the Options drop-down menu. From the menu, select Lock Report.

Once the report is locked, you will no longer be able to edit it. The report will automatically lock after 30 days, but you can lock it manually at any time before then.

5. What is included in the Reasonable Compensation Figure?

Reasonable compensation is the amount of money that is paid to an employee for their services. It is calculated based on the employee’s job title, experience, and the industry standard.

For the purpose of calculating reasonable compensation, taxable Medicare wages and flexible spending accounts are included. Taxable Medicare wages are the wages that are subject to Medicare taxes. Flexible spending accounts are accounts that employees can use to pay for certain medical expenses.

Non-taxable fringe benefits, such as health insurance, vehicle or vehicle allowance, stock options, company loans, and other items not reported on a W-2 as Medicare wages, are not included in reasonable compensation. These benefits are not subject to Medicare taxes and are not considered part of the employee’s wages.

Example 1: (S Corp)
Cash available for reasonable compensation, health insurance payments and distribution $130,000
– Reasonable compensation based on RCReports $80,000
– Health insurance $15,000
In this example
– Line 1 and 16 of the W-2 would reflect $95,000
– Line 3 and 5 of the W-2 would reflect $80,000
– The taxpayer would have distributions of $35,000

Example 2: (S Corp)
Cash available for reasonable compensation, health insurance and distributions $85,000
– Reasonable compensation based on RCReports $80,000
– Health insurance $15,000
In this example
– Line 1 and 16 of the W-2 $85,000
– Line 3 and 5 of the W-2 $70,000
– The taxpayer would have distributions of $-0-

6. What if an S Corporation Owner Can’t Afford to Pay Reasonable Compensation?

The amount of reasonable compensation that is actually paid is tied to distributions, not profit or loss. This is because the IRS requires S corporations to pay reasonable compensation to their shareholder-employees, even if the company is not profitable. The amount of reasonable compensation is determined by a number of factors, including the shareholder-employee’s job duties, experience, and the industry standard.

The reason why this is the number one question that you receive is because it can be a complex issue. There are a lot of factors to consider when determining reasonable compensation, and it is important to get it right. If the IRS determines that an S corporation has underpaid its shareholder-employees, it can assess taxes and penalties.

7. Why are hours limited to 40 for compliance reports?

Cerebral Tax Advisors bases its methodology on IRS guidelines and court cases. In the recent court case McAlary v. the IRS, both the IRS expert and the courts used the industry standard of 40 hours per week to calculate reasonable compensation, even though Mr. McAlary worked well over 40 hours per week (he was in the 60 to 80 hours per week range). This case can be found in the resource library located in the tools tab.

Therefore, Cerebral Tax Advisors limits hours to 40 for its S & C Corp Compliance Reports. If you want to exceed 40 hours per week, you can do so by running a Planning report for the client. However, Cerebral Tax Advisors does not recommend exceeding 40 hours per week, and it does not limit hours to 40 in the Planning (or Normalization) reports.

8. What should I consider when selecting proficiency?

Imagine yourself in a room with 100 other people who do the same job as you. If you had to rate your proficiency among those 100 people, from low (bottom 10%) to high (top 10%), where would you place yourself?

Proficiency is a subjective measure, but it is based on how well someone performs a particular task. There are many factors that can contribute to proficiency, such as experience, education, and natural ability.

If I had to rate my proficiency among 100 peers, I would say that I am in the top 50%. I have a lot of experience in my field, and I am constantly learning new things. I am also confident in my ability to perform my job well.
However, I know that there are many people who are more proficient than me. I am always striving to improve my skills and knowledge, so that I can continue to be a valuable asset to my team.

9. Where do you get your data?

The exact methodology used to derive our wage estimates is a trade secret. However, we can share that all data meets strict confidence levels. Some of our sources of raw data include the U.S. Bureau of Labor Statistics (BLS), the U.S. Census Bureau, and state departments of labor.

We also provide a comprehensive Methodology report to any of our users who are presenting one of our reports in an examination or litigation. This report provides more detailed information about the methodology used to derive our wage estimates.

Reasonable Compensation Report

What is a Reasonable Compensation Report?

How to Request an RC Report?

Frequently Asked Questions

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