{"id":30434,"date":"2023-09-11T08:00:00","date_gmt":"2023-09-11T13:00:00","guid":{"rendered":"https:\/\/taxprocenter.proconnect.intuit.com\/?p=30434"},"modified":"2023-10-12T12:03:18","modified_gmt":"2023-10-12T17:03:18","slug":"reasonable-comp-demoting-a-ceo-makes-sense","status":"publish","type":"post","link":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/","title":{"rendered":"Reasonable comp: Demoting a CEO makes sense"},"content":{"rendered":"\n<p>A key tax planning strategy for small business owners who have S Corporation entities is to help them reduce self-employment tax obligations by paying themselves as an employee of their business. If you employ this strategy for your clients, then you are likely aware that you must also calculate their <a href=\"https:\/\/taxprocenter.proconnect.intuit.com\/tax-law-and-news\/navigating-reasonable-compensation-for-niche-based-clients\/\" target=\"_blank\" rel=\"noreferrer noopener\">reasonable compensation<\/a>. The question is\u2014as it should be\u2014if the client uses the \u201cCEO\u201d title in their business, is this the role for which you should calculate their reasonable compensation?<\/p>\n\n\n\n<p>In the best interest of your client, the answer most often to calculating reasonable compensation for them as a CEO should be \u201cno.\u201d&nbsp;See below for four solid reasons why, but first, a here&#8217;s a reasonable compensation refresher so you can understand the logic of the argument for demoting your client when it comes to how much their salary should reasonably be reported to be.<\/p>\n\n\n\n<p>Reasonable compensation is supposed to equate to the true salary of someone who is performing the specific functions of a role in an organization. It can only be accurate and defensible to the IRS, should a reasonable comp audit be ordered, if it is based on what your client would be paid for the work they do in their business.<\/p>\n\n\n\n<p>Most business owners wear many hats and not all of them are at the CEO level. Therefore, if you aren\u2019t basing your client\u2019s compensation on real, verified data about the true market value of the services they provide to their own business, you may be increasing their audit risk and, potentially, increasing their tax bill more than necessary.<\/p>\n\n\n\n<p class=\"has-x-large-font-size\"><strong>Four reasons to avoid the CEO classification<\/strong><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Not having accurate reasonable compensation can leave your client vulnerable to wage reclassification and additional payments. <\/strong>If your client&nbsp;takes distributions at the CEO-level and the distributions are deemed to be too low by the IRS, you risk them having all of their distributions reclassified. This could mean hefty penalties, interest, and back taxes. The best way to protect your client and yourself is to run a reasonable compensation analysis each year, and keep the report on file and easily accessible should the IRS come knocking.<\/li>\n\n\n\n<li><strong>Inaccurate calculation of reasonable compensation at too high of a level may skew the value of a clients\u2019 business. <\/strong>By ensuring officer salaries are indeed reasonable, you will have true clarity on the actual profitability of a company\u2014and therefore&nbsp;its market value. This can prevent overpayment or underpayment for your client\u2019s business.<\/li>\n\n\n\n<li><strong>Changes in&nbsp; family, health, or other personal situations may impact your client\u2019s true reasonable compensation. <\/strong>Imagine if your client\u2019s distributions are based on the inflated calculation of a CEO role and they experience a divorce. If a high salary is used, and alimony or child support is awarded, that may mean they have to pay more based on their earnings.<\/li>\n\n\n\n<li><strong>A clients\u2019 future retirement income is also affected by the accuracy of reasonable compensation calculations.<\/strong> The level of compensation claimed and ultimately paid via payroll taxes will impact your clients\u2019 <a href=\"https:\/\/taxprocenter.proconnect.intuit.com\/tax-law-and-news\/social-security-benefits-may-be-taxable\/\" target=\"_blank\" rel=\"noreferrer noopener\">Social Security<\/a> payouts down the road. If the wages are unrealistically high and the wages are at some point reclassified, this can cause a discrepancy between expected retirement income and actual income. Alternatively, paying too much into Social Security can shortchanges a business owner\u2019s cash flow in the short term if the CEO-level contributions are not realistic.<\/li>\n<\/ol>\n\n\n\n<p class=\"has-x-large-font-size\"><strong>Are you ready to demote your client?<\/strong><\/p>\n\n\n\n<p>Having an open discussion on your clients\u2019 reasonable compensation reality, based on their actual role in the company they own, supports your role as a <a href=\"https:\/\/taxprocenter.proconnect.intuit.com\/advisory-services\/tax-advisory-price-process-and-getting-started\/\" target=\"_blank\" rel=\"noreferrer noopener\">true business advisor<\/a> in your clients\u2019 eyes.<\/p>\n\n\n\n<p>In addition, educating your clients using the four-point list can help you fairly and accurately leverage reasonable comp analysis as a tax savings strategy related to payroll taxes for your clients and a revenue stream. You can package the reporting as an advisory service or an add on at tax planning time in your firm.<\/p>\n\n\n\n<p>Most importantly, it\u2019s a critical step in protecting your client and their business from the financial and audit risks related to overestimating compensation for S Corp officers instead of having defensible reasonable comp reports that will stand up under IRS scrutiny.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A key tax planning strategy for small business owners who have S Corporation entities is to pay themselves as an employee of their business.<\/p>\n","protected":false},"author":144648993,"featured_media":30437,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rkv_browse_by_id":0,"rkv_cta_id":0,"rkv_optimize_for_pagespeed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"useModifiedDate":false,"customPublishDate":"","_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[646041873],"tags":[646041848],"intuit_collection":[],"intuit_series":[],"coauthors":[646041887],"class_list":["post-30434","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-advisory-services","tag-tax-advisory"],"header_image":"","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - 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Cytron, ABC, is editor of several Intuit blogs, including the Firm of the Future, the QuickBooks blog, and the Tax Pro Center. He is president of Cytron and Company, known for helping companies and organizations improve their bottom line through strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (medical, legal, accounting, engineering), high-tech and B2B\/B2C product\/service sales.\",\"url\":\"https:\/\/accountants.intuit.com\/taxprocenter\/author\/scytron1\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Reasonable comp: Demoting a CEO makes sense - Tax Pro Center | Intuit","description":"A key tax planning strategy for small business owners who have S Corporation entities is to pay themselves as an employee of their business.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/","og_locale":"en_US","og_type":"article","og_title":"Reasonable comp: Demoting a CEO makes sense - Tax Pro Center | Intuit","og_description":"A key tax planning strategy for small business owners who have S Corporation entities is to pay themselves as an employee of their business.","og_url":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/","og_site_name":"Tax Pro Center | Intuit","article_published_time":"2023-09-11T13:00:00+00:00","article_modified_time":"2023-10-12T17:03:18+00:00","og_image":[{"width":1440,"height":608,"url":"https:\/\/taxprocenter.proconnect.intuit.com\/wp-content\/uploads\/2023\/08\/Reasonable-comp-Demoting-a-CEO-makes-sense-copy.png","type":"image\/png"}],"author":"Paul Hamann","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Paul Hamann","Est. reading time":"4 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/#article","isPartOf":{"@id":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/"},"author":{"name":"Scott Cytron","@id":"https:\/\/accountants.intuit.com\/taxprocenter\/#\/schema\/person\/9b117b8074d84a9ab454ca63bac2f5db"},"headline":"Reasonable comp: Demoting a CEO makes sense","datePublished":"2023-09-11T13:00:00+00:00","dateModified":"2023-10-12T17:03:18+00:00","mainEntityOfPage":{"@id":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/"},"wordCount":711,"commentCount":0,"image":{"@id":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/#primaryimage"},"thumbnailUrl":"https:\/\/taxprocenter.proconnect.intuit.com\/wp-content\/uploads\/2023\/08\/Reasonable-comp-Demoting-a-CEO-makes-sense-copy.png","keywords":["Tax Advisory"],"articleSection":["Advisory Services"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/#respond"]}]},{"@type":"WebPage","@id":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/","url":"https:\/\/accountants.intuit.com\/taxprocenter\/advisory-services\/reasonable-comp-demoting-a-ceo-makes-sense\/","name":"Reasonable comp: Demoting a CEO makes sense - 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Cytron, ABC, is editor of several Intuit blogs, including the Firm of the Future, the QuickBooks blog, and the Tax Pro Center. He is president of Cytron and Company, known for helping companies and organizations improve their bottom line through strategic public relations, communications, marketing programs and top-notch client service. 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