Determining "reasonable compensation" for an owner's salary can be complex and depends on various factors such as industry, location, business size, and profitability. Small business owners can explore the following resources to gather insights on reasonable compensation:
Industry Associations and Networks:
Industry-specific trade associations or professional networks often provide resources and guidelines for small business owners regarding compensation benchmarks. They may publish reports, conduct surveys, or offer access to salary data specific to their industry. Participating in industry events, forums, or networking groups can also provide opportunities to discuss compensation practices with peers and gain insights.
There are various compensation surveys conducted by consulting firms, industry organizations, or human resources associations that provide salary benchmarks across different job roles and industries. Examples include surveys by Payscale, Salary.com, or industry-specific compensation surveys published by reputable firms. These surveys typically provide average salary ranges for specific positions, including owner/executive roles, and can help small business owners gauge how much to pay themselves and meet reasonable compensation requirements.
Consulting with professional advisors, such as accountants, tax professionals, or business consultants, can provide valuable guidance on determining reasonable compensation. These professionals have experience working with businesses in similar industries and can provide insights based on their expertise and knowledge of local market conditions. They can consider factors like profitability, industry standards, and legal requirements to help determine an appropriate owner's salary.
Government agencies often publish wage data that can provide general guidance on salary ranges. For example, the U.S. Bureau of Labor Statistics (BLS) provides wage and salary information for various occupations and industries through their Occupational Employment Statistics program. While this data may not specifically address owner's compensation, it can offer broader context and comparative data for certain roles within a business.
It's important to note that reasonable compensation may also be influenced by factors such as the business's financial performance, industry benchmarks, the owner's qualifications, and the role they play within the organization. Consulting with a qualified accountant or tax professional who can consider the specific circumstances of your business and provide personalized advice is recommended when determining how much to pay yourself for an owner's salary.
DBA Can Help!
At DBA, we provide reasonable compensation studies for all of our newly engaged clients during the implementation phase. The owner’s salary is one aspect of a business owner’s holistic tax strategy. Having reliable data to substantiate your owner’s compensation is invaluable when faced with scrutiny from the IRS. Contact our team today!
Looking for additional tax tips? Charles Jenkins, Jr., CPA at Dillon Business Advisors walks through tax savings you may be missing, which will support your efforts to maximize savings and reduce your tax liability.