Extended S-Corp returns: New revenue and client opps

Extension season is just around the corner. If you have S-Corporation clients who are on extension, now is the time to start strategizing to ensure you optimize your workflow and all of the potential tax advisory opportunities that may affect your clients.

One often-overlooked area of taxation for S-Corp owners and partners is reasonable compensation. This is unfortunate for multiple reasons, including the following:

Inaccurate and indefensible reasonable compensation calculations leave your client open to audit liability. The IRS has been consistent with their intent to use their new wave of funding to increase enforcement, particularly among high-net-worth individuals and complex pass-through entities such as partnerships and S-Corps. As a result, it is prudent to start preparing to potentially defend these clients from reasonable compensation and payroll tax audits. Better yet, be proactive in ensuring they are in compliance with these, and, of course, all other areas of tax law.

Clients may pay more payroll taxes than necessary without accurate compensation calculations. If you have S-Corp clients paying themselves via a W-2, it is imperative that you complete a reasonable compensation analysis every year and that you can keep it with your workpapers in case of future audits.

It’s the law! Shareholder employees must be paid via W-2. Even if the amount owed in taxes is the same if your client pays themselves via a 1099, they can be assessed penalties for doing so when they are required to be paid a salary to be reported on a W-2.

Shareholder employees must receive reasonable compensation before taking distributions. If you have S Corp owners who received distributions and have not paid themselves W-2 wages, you might as well go ahead and paint a target on your back. Equally as dangerous are S Corp owners who pay themselves an unreasonably low salary in an attempt to skirt payroll taxes. Based on the recent updates from the IRS, this is exactly what the agency will be looking for in their enforcement efforts.

If you have S Corp owners who received distributions and have not paid themselves W-2 wages, you might as well go ahead and paint a target on your back.

You must have documentation to back up reasonable compensation. Companies have the responsibility to demonstrate the reasonableness of the S-Corp owner’s compensation, and the best way of doing so is with credible independent research and documentation you can obtain with reasonable compensation software.

What should you do when you see improper reasonable compensation calculations—or none at all—on a client tax return? Thankfully, during extension season, there is still time to fix errors. It can be trickier to handle if you have clients who haven’t paid themselves W-2 wages or didn’t take reasonable compensation in prior years. Now is the time to get prepared and be proactive before the tax return extension deadline.

Leverage extension season to optimize reasonable compensation reporting and revenue opportunities.

The majority of S-Corp owners are not familiar with reasonable compensation, much less the mechanics of calculating it accurately or in a manner that can hold up to increased IRS scrutiny. This creates a true area where you can have immense value during tax return extension season. Not only will this elevate you in the eyes of your clients; it will also open the door to a wealth of opportunities to make tax extension season and your whole year more profitable.