With the economy suffering as it has in recent years, these government agencies are suffering financially and looking for additional ways to raise revenue. To fill the void, they have stepped up their auditing efforts to focus on compensation issues for small business owners, who are known not to fully comply with the law.
This has been beneficial to the government because most small businesses do not have the funds to sustain a lengthy legal battle and must give in and pay the fine.
To avoid the pain and agony of a compensation audit, I will summarize a few points below and recommend that any experienced business owner or just starting out seek the help of an accountant familiar with these issues to ensure compliance.
A) The basic belief of the IRS is that nobody works for free, I think we can all agree with this. So, in most cases, the owners should receive a salary from their business.
B) How much a business owner should charge, that depends, the test is what the salary would be if that business owner worked for a similar company doing the same type of work. This is what is called reasonable compensation.
C) Distributions from “S Corp” companies are generally classified as dividends, for which no payroll taxes are paid. You can take these types of distributions, but they must not be excessive in relation to the salary taken.
D) Independent Contractor vs. Employee Issue: There is a fine line between these. Basically, if the employer exercises financial and behavioral control over the worker, he or she is usually an employee. Also the relationship between the parties helps to determine the state, for example. Are benefits being paid to the worker, is there a contract between the parties that establishes the relationship?
In addition, there are several other compensation-related issues that business owners need to be aware of, and if they don’t comply, they can be heavily fined: for example, many states require employers to provide employees with a pay stub. payment each pay period. It sounds like a no-brainer, but you’d be surprised how many small business owners don’t follow through on this one.
Being a business owner comes with a lot of responsibility. Approximately 50% of new businesses fail in their first year and 85% in their first five years. Some of the reasons are non-compliance issues like the ones above that carry heavy penalties. That’s why seeking the services of a good accountant is a worthwhile investment to keep you in compliance while helping your business grow.
