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Proactive Profit Management: A Solution to Late Payroll Tax Deposits

Falling behind on payroll tax deposits stems from inadequate profitability, not neglect. When cash flow is tight, business owners may prioritize immediate expenses over payroll taxes, hoping things will improve. However, the IRS doesn’t see it that way. Failing to deposit payroll taxes can result in severe penalties, business closure, and even personal liability. Improving profitability is essential to avoid this, and the best approach is proactive profit management.

Where to Start: Fixing Profitability

  1. Raise Prices Regularly
    One simplest and most effective way to boost profitability is to raise your prices. Many small business owners fear losing customers by increasing rates, but regularly adjusting your pricing—especially to account for inflation—ensures you’re not leaving money on the table. Evaluate your pricing annually, and be transparent with your customers about the value you’re providing.
  2. Cut Unnecessary Expenses
    Review your operating expenses to identify waste. Are you paying for software subscriptions you no longer use? Can you renegotiate vendor contracts or lease terms? Minor cuts in unnecessary spending can add up, freeing cash for critical obligations like payroll taxes.
  3. Focus on High-Margin Products or Services
    Not all revenue is created equal. Analyze your offerings and focus on those with the highest profit margins. Consider scaling back on low-margin products or services that drain resources without contributing significantly to your bottom line.
  4. Implement Profit-First Accounting
    Adopt a “profit-first” approach to your finances. Set aside a portion of revenue for key obligations—like payroll taxes—before paying operating expenses. This ensures that taxes are always prioritized and helps you avoid the temptation to reallocate funds.
  5. Streamline Operations
    Look for ways to improve efficiency within your business. Automate repetitive tasks, invest in technology that reduces labor costs, or optimize workflows to increase productivity without adding expenses.
  6. Upsell to Existing Customers
    Increasing revenue doesn’t always require finding new customers. Upselling or cross-selling to your existing customer base can boost sales with minimal marketing costs. For example, offer premium options or bundle products and services for higher value.
  7. Track and Adjust Regularly
    Profit management isn’t a one-time task—it’s an ongoing process. Review your financial statements monthly to monitor performance, track trends, and adjust as needed. This helps you stay ahead of cash flow issues and ensure consistent profitability.

Preventing Payroll Tax Issues

By improving profitability, you can avoid the vicious cycle of falling behind on payroll taxes and incurring penalties. The IRS takes unpaid payroll taxes seriously, and penalties can quickly spiral out of control. Proactive profit management ensures you have the resources to meet tax obligations on time and protects your business from IRS enforcement actions like levies, liens, or the Trust Fund Recovery Penalty.

Conclusion

Fixing profitability starts with raising prices, cutting waste, and focusing on high-margin activities. These steps, consistent tracking, and a profit-first mindset can help you avoid financial challenges. By taking control of your profitability, you can avoid the stress of late payroll tax deposits and keep your business on solid financial ground.

Boost Your Profitability to Solve Payroll Tax Issues for Good

Some business owners “borrow” from payroll tax deposits when cash flow gets tight, hoping for a turnaround. But this is a dangerous gamble. Payroll taxes aren’t optional—they’re trust fund taxes. Failing to deposit them is viewed as theft by the IRS, and the consequences are severe.

The Danger of Skipping Payroll Taxes

If payroll tax deposits aren’t made, penalties and interest escalate quickly. The IRS can seize assets, levy bank accounts, and even shut down your business. Worse, they can hold you personally liable through the Trust Fund Recovery Penalty, putting your personal finances—bank accounts, home, and future income—on the line. Bankruptcy won’t erase trust fund debt, leaving you struggling long after your business is gone.

The Real Problem: Profitability

Most payroll tax issues stem from poor profitability, not neglect. When profits are tight, owners often prioritize other bills, hoping for better times. But hope isn’t a strategy. Addressing profitability is the only way to ensure payroll taxes are paid on time.

How to Fix the Problem

  1. Understand Your Finances
    Review your cash flow, cut unnecessary expenses, and find operational efficiencies.
  2. Increase Revenue
    Focus on upselling, marketing, and exploring new markets to improve sales.
  3. Seek Professional Advice
    Work with a financial advisor or accountant to create a plan to stabilize your business and prioritize taxes.
  4. Contact the IRS
    Contact the IRS for options like Installment Agreements or Offers in Compromise if you’re behind.

Don’t Let Payroll Taxes Close Your Doors

Payroll tax debt can destroy your business and haunt you personally. Prioritize profitability, take control of your finances, and act now to prevent the IRS from taking drastic action. With the right steps, you can solve payroll tax issues for good and secure your business’s future.

Who Claims the Child? The IRS Does Not Care About Your Decree

The IRS uses specific guidelines based on custody arrangements to determine who can claim a child as a dependent for tax purposes. One key factor that often arises in disputes is where the child spent the majority of nights during the tax year. Understanding these rules is essential for family law attorneys advising clients in divorce and custody cases.

The Majority-of-Nights Rule

The IRS considers the custodial parent as the one who can claim the child as a dependent. The custodial parent is the parent with whom the child spent more than half the nights (183 nights or more) during the calendar year. This rule applies regardless of what a divorce decree or custody agreement may specify.

Here are the basics of how the IRS calculates this:

  • Counting Nights: A night is one in which the child sleeps at a parent’s residence, even if the child is temporarily absent due to special circumstances, like illness, school trips, or summer camp.
  • Shared Time: If the child spends an equal number of nights with both parents, the IRS will turn to tie-breaker rules, prioritizing the parent with the higher adjusted gross income (AGI).

Exceptions to the Rule

Sometimes, the noncustodial parent may claim the child as a dependent. For this to happen, the following conditions must be met:

  1. Custodial Parent Releases Claim: The custodial parent must sign IRS Form 8332, releasing their claim to the dependent.
  2. Form Submission: The noncustodial parent must attach Form 8332 to their tax return to claim the child.

Without this signed form, the IRS will default to the custodial parent’s claim, even if the divorce decree assigns dependency to the noncustodial parent.

Common Issues

  • Mistakes in Counting Nights: Parents may miscount the number of nights a child spent with them, leading to duplicate claims. This often triggers an IRS audit or denial of both parents’ claims.
  • Confusion with Decrees: Many parents assume that the terms of a divorce decree are binding on the IRS. However, the IRS follows its own rules, which can override the decree unless Form 8332 is properly executed.

Tips for Family Law Attorneys

  1. Keep Accurate Records: Encourage clients to maintain a calendar or log of where the child spent each night. This is especially important for parents with shared custody arrangements.
  2. Address IRS Forms in Agreements: Include provisions in divorce decrees about who will claim the child and ensure the custodial parent agrees to sign Form 8332 if the noncustodial parent is to claim the dependent.
  3. Explain Tie-Breaker Rules: Educate clients about how the IRS resolves disputes if custody is evenly split.

Family law attorneys can help clients avoid confusion, missed tax benefits, and potential IRS audits by emphasizing the importance of the majority-of-nights rule. Proper planning and record-keeping are key to navigating these rules successfully.

It’s Time to Simplify the Tax Code

The U.S. tax code has become a maze of regulations that overwhelms taxpayers and consumes billions of hours annually. The National Taxpayers Union Foundation estimates Americans spend 6.5 billion hours on tax compliance, costing over $280 billion per year. Simplifying the code isn’t just about saving time—it’s about ensuring fairness and restoring trust in the system.

The Challenges of a Complex Tax Code

The tax code’s complexity disproportionately affects those with fewer resources. While the wealthy and corporations can afford accountants to minimize taxes, middle- and low-income taxpayers often struggle. Programs like the Earned Income Tax Credit (EITC), meant to help low-income individuals, are so complicated that millions miss out entirely. Simplification would level the playing field and reduce errors.

Taxable income calculations add further frustration. Determining how much Social Security is taxable involves multi-step formulas comparing adjusted gross income (AGI), nontaxable interest, and half of benefits against thresholds based on filing status. These rules confuse taxpayers and lead to errors. Simplifying such provisions would ease the burden.

How Simplification Can Be Achieved

  • Consolidate Deductions and Credits
    To simplify eligibility and reduce confusion, similar benefits, such as tuition expenses, student loan interest, and education credits, can be combined into one “Education Expense Deduction.”
  • Expand Pre-Filled Tax Returns
    The IRS could pre-fill returns for taxpayers with straightforward situations, like W-2 earners, using existing records. Filing would then be as simple as reviewing and submitting.
  • Eliminate Corporate Income Taxes
    Corporate taxes are passed on to consumers through higher prices, employees through lower wages, and shareholders through reduced returns. Eliminating them would remove this hidden tax, address the double taxation problem on corporate earnings, and encourage reinvestment in growth and innovation, keeping business investment strong.
  • Eliminate Special Capital Gains Tax Rates
    Replace reduced rates for long-term gains with an inflation-adjusted basis for long-term assets. For example, a $10,000 stock bought 20 years ago that has doubled with inflation would have an adjusted basis of $20,000, taxing only real gains. This would ensure fairness while simplifying the system.
  • Automate Tax Benefits
    Automatically applying credits like the Child Tax Credit using IRS records would reduce errors and ensure eligible taxpayers don’t miss out.

A Path Forward

The tax code has grown increasingly complex over time, piling on burdens for taxpayers. The last significant simplification came with the Tax Reform Act of 1986. Now is the time for another overhaul. By consolidating deductions, automating benefits, eliminating corporate taxes, and reforming capital gains taxation, we can save millions of hours and restore simplicity to the system.

The First 3 Things to Do Depending Upon Receiving an IRS Audit Notice

Receiving an IRS audit notice can feel overwhelming, but your steps will depend on the type of audit: correspondence, office, or field. Each requires a tailored approach, and professional representation is especially helpful in avoiding common missteps, like saying too much during in-person meetings.

Correspondence Audit: Respond by Mail

This is the simplest type of audit, conducted entirely through mail and focused on a specific item.

  1. Read the Notice: Identify the issue and deadline. Focus only on the requested items.
  2. Gather Documents: Collect records, such as W-2s, 1099s, or receipts, that address the IRS’s concerns.
  3. Respond Clearly: Write a concise cover letter explaining your position on each issue. Include supporting documents, and send everything by certified mail.

Office Audit: Let Your Representative Handle It

In an office audit, the IRS requests a meeting to review specific items like deductions or credits.

  1. Understand the Scope: Review the notice to identify what’s being questioned. Collect and organize related records for your representative to present.
  2. Limit Your Involvement: Instead of attending the meeting yourself, allow a tax professional—such as a CPA or Enrolled Agent (EA)—to go on your behalf. They can answer questions, keep discussions focused, and prevent over-disclosures.
  3. Trust Their Expertise: A representative knows when to say, “Let me check and get back to you,” instead of risking an inaccurate guess at the answer.

Field Audit: Manage the Environment

A field audit is more comprehensive, often involving the entire return and conducted at your home or business.

  1. Prepare Broadly: Gather all financial records for the years under review. Identify the potential big issues and be ready to defend your position on each.
  2. Limit Access: Designate a specific area for the meeting and restrict access to unrelated documents or areas.
  3. Hire a Professional: Have your tax representative manage the field audit directly. This ensures that conversations remain focused and reduces your risk of unintentional errors or over-sharing.

Final Thoughts

Preparation and professional representation are crucial in any audit. Many taxpayers harm their case because they feel like they must answer every question, regardless of how long ago the transaction occurred. To avoid looking stupid, they often guess. The auditor could take these guesses incorrectly, leading to a more extended and detailed audit.

A representative does not have this problem. Nobody expects them to be able to answer every question, and they have an easy time saying, “I don’t know, let me get back to you on that.” Whether it’s a correspondence, office, or field audit, staying organized and trusting an expert to take the lead can ensure a smoother resolution.

Navigating the 1099-K Reporting Changes for 2024: Key Insights

The IRS’s Form 1099-K reporting requirements continue to evolve, with important changes for 2024. In IRS News Release IR-2023-221, the agency delayed the implementation of the controversial $600 reporting threshold for third-party payment platforms. Instead, a $5,000 threshold will apply for the 2024 tax year. Payment processors like PayPal, Venmo, and Stripe must issue Form 1099-K for payments exceeding this amount for goods or services. However, some platforms may issue 1099-Ks for lower amounts, adding to taxpayer confusion. Here’s how to manage these changes, address reporting issues, and stay compliant.

 

Challenges with 1099-K Reporting

Even with the $5,000 threshold, challenges persist:

  • Misclassified Transactions: Platforms may report personal transactions as taxable income.
  • Processor Refusals to Correct Errors: If payment processors don’t amend a mistaken 1099-K, taxpayers must account for and document the discrepancy on their returns.
  • Voluntary Reporting at Lower Thresholds: Some platforms issue 1099-Ks for amounts below $5,000, creating unnecessary complexity for occasional sellers or gig workers.
  • Transcript Delays: Filing early without waiting for IRS transcripts, which may not be updated until late spring or early summer, can lead to discrepancies.

Why Filing an Extension Might Help

Filing an extension gives you until October 15 to file your return, allowing time to align your reported income with IRS records. The IRS typically updates income transcripts, including 1099-K data, after April 15 and sometimes as late as June. Waiting for these updates ensures that your return matches IRS records, minimizing the risk of discrepancies that could trigger audits.

How to Avoid IRS Audits

The best way to minimize the risk of an IRS audit when dealing with Form 1099-K is to address potential errors proactively and report income accurately. Here’s how:

  1. Document Non-Taxable Transactions
    • If your Form 1099-K includes personal transactions or other non-taxable payments, gather documentation proving they are not business income. Examples include memos from the payment platform indicating the purpose of the transaction (e.g., “gift” or “reimbursement”) and bank statements showing corresponding payments to friends or family.
  2. Correct Errors Directly with Payment Processors
    • If a 1099-K includes incorrect information, contact the payment processor to request a corrected form as soon as possible. While not all processors may comply, requesting the correction shows good faith effort and strengthens your position if audited.
  3. Adjust Your Return for Errors
    • If the processor won’t issue a corrected 1099-K, report the full amount from the form as income but include an adjustment for the erroneous portion. For example, create a line item on Schedule C or other relevant forms labeled “Adjustment for Non-Taxable 1099-K Income” and subtract the incorrect amount. Keep detailed records to justify the adjustment.

Conclusion

With the $5,000 threshold for 1099-K reporting in 2024, taxpayers must carefully review forms, reconcile records, and address errors proactively. If a 1099-K includes non-taxable income that the processor won’t correct, document the issue, explain the discrepancy on your return, and maintain detailed records to support your position.

By taking these steps, including filing an extension when needed, you can stay compliant, avoid audits, and handle reporting challenges confidently. For complex cases, consult a tax professional to ensure accuracy and compliance.

Distributions vs. Salary for S Corp Owner-Employees

As an S Corp owner-employee, understanding how the IRS views money taken out of your business is crucial. The IRS considers all withdrawals as wages first, until they exceed “reasonable compensation” for your role. This ensures payroll taxes are paid on earnings tied to your labor.

Wages vs. Distributions: The Basics

  1. Wages First: Any money you withdraw is treated as wages subject to payroll taxes until you’ve paid yourself a reasonable salary.
  2. Distributions Second: Only amounts above reasonable compensation can be classified as distributions, which are not subject to payroll taxes.

For example, if industry standards suggest a $50,000 salary and you withdraw $70,000, the first $50,000 is wages. The remaining $20,000 can be a distribution of earnings.

Why It Matters

Minimizing salary to maximize distributions and avoid payroll taxes is a red flag for the IRS. Auditors increasingly target S Corps with low salaries and high profits. If they find insufficient wages, the IRS can reclassify distributions as wages, resulting in back taxes and penalties.

How to Handle Low-Earning or Multi-Year Scenarios

  • Pay What You Can: Allocate as much as possible toward wages and keep distributions minimal or preferably nonexistent.
  • Multi-Year Planning: If your current-year distributions include profits retained from prior years, clarify this in your records. However, remember that even in these cases, withdrawals are treated as wages first for the current year’s labor. Prior years’ retained earnings can only be tax-free after your salary requirements are satisfied.

Preparing for an Audit

The best defense is preparation. Create a written analysis showing what replacing you with an outsider would cost. IRS auditors are used to encountering taxpayers with no documentation of reasonable compensation, so even a half-baked analysis (e.g., industry data or a memo) can be enough to convince them to focus elsewhere.

Paying your salary first and keeping records on how you determined your reasonable compensation is how you avoid the hassle of dealing with the IRS on this issue.

IRS Audit Priorities for 2025

The IRS is sharpening its focus on specific areas of tax compliance for 2025, particularly addressing significant non-compliance issues. Recent announcements reveal the agency’s commitment to using enhanced resources and data analytics to ensure fair enforcement. Here’s a look at some key areas where the IRS plans to direct its audit efforts:

1. Labor Brokers in the Construction Industry

Labor brokers have come under increased scrutiny for facilitating tax evasion. In some cases, brokers create shell companies to underreport wages, avoid payroll taxes, and pay workers in cash. These schemes lead to significant tax revenue losses and harm to workers who miss out on benefits like Social Security and unemployment insurance.

The IRS is ramping up audits of labor brokers and contractors who use them. Contractors may also face liability for unpaid payroll taxes if they’re found complicit or fail to exercise due diligence in verifying the broker’s compliance.

2. Reasonable Compensation for S Corporation Owners

Another key focus area is the issue of reasonable compensation for S-corporation owners. S-corporation owners often receive distributions, which aren’t subject to payroll taxes, in addition to a salary. However, some owners improperly minimize their salaries to reduce Social Security and Medicare taxes while taking larger distributions.

The IRS requires that S Corp owners pay themselves a salary that reflects the reasonable value of their services. If the salary is deemed unreasonably low, the IRS may reclassify distributions as wages and assess payroll taxes, penalties, and interest. This remains a hot audit topic, addressing a widespread tax avoidance strategy among small business owners.

3. High-Income Non-Filers

The IRS also focuses on high-income non-filers—individuals who earn substantial income but fail to file tax returns. These cases represent a significant source of lost tax revenue. With new data analytics tools and improved reporting systems, the IRS is better equipped to identify non-filers trying to evade their tax obligations.

The focus will be on those with income over $100,000 who have not filed required returns, especially in industries or professions where non-filing is common. The IRS prioritizes enforcement actions in these cases to ensure compliance and recover unpaid taxes.

4. High-Income Individuals and Large Corporations

The IRS is ramping up audits of individuals with income over $10 million and corporations with assets exceeding $250 million. The agency aims to triple audit rates for large corporations and increase scrutiny on wealthy taxpayers, particularly those suspected of using complex tax avoidance strategies.

5. Cryptocurrency Transactions

With the rise of digital assets, the IRS is intensifying efforts to ensure taxpayers report gains and losses from cryptocurrency transactions. Enhanced reporting requirements and expanded audits aim to close the gap in compliance in this rapidly growing sector.

6. Foreign Bank Accounts and Assets

Taxpayers with foreign financial interests must file FBAR (Foreign Bank Account Reporting) forms if their account balances exceed $10,000. The IRS focuses on high-value non-filer cases to ensure compliance with international tax reporting requirements.

7. Abusive Tax Schemes

The IRS continues its crackdown on abusive tax shelters, including micro-captive insurance arrangements and syndicated conservation easements, often marketed to high-income taxpayers. These schemes allow participants to claim inflated deductions or avoid taxes, leading to substantial revenue losses.

Conclusion

The IRS is making a significant shift in its audit priorities, moving away from minor issues like travel and entertainment deductions and focusing on areas that involve much more substantial sums of money. High-income non-filers, labor brokers, S Corporation owners, and taxpayers involved in cryptocurrency or foreign assets are now at the forefront of the agency’s enforcement efforts. This strategic pivot aims to close the tax gap by targeting the most significant sources of non-compliance.

Taxpayers in these high-risk categories should take proactive steps to ensure full compliance.

If You Can’t Pay the Payroll Taxes – Stop Digging the Hole

Let’s talk about one of the toughest challenges you can face as a business owner: falling behind on payroll taxes. When cash is tight, and the bills keep coming, it’s easy to feel trapped in a deep hole. The worst thing you can do? Keep digging. If you can’t pay your payroll taxes, you may have to make painful choices—like letting employees go—to protect your business and future.

The IRS Takes a Double Hit

Here’s why payroll taxes are a non-negotiable priority. When you withhold taxes from your employees’ paychecks—like Social Security and Medicare—you’re holding that money in trust for the government. It’s not yours to spend.

But if you use those trust funds to cover other business expenses, the IRS doesn’t just lose once—they get hit twice. Your employees still report those withheld amounts on their tax returns, and if they’re due a refund, the IRS has to pay it out even though you never handed over the funds. This is why the IRS is so aggressive about payroll tax collection: they’re out the original taxes and the refunds.

When You Use Trust Funds for Personal Needs

If your financial situation has led you to use payroll trust funds for personal expenses—whether it’s covering a mortgage payment, credit card bill, or other personal obligations—be warned: when the IRS audits you, it’s not just penalties and interest you’ll face. Any trust funds diverted for personal use will be treated as taxable income.

This means you could owe even more in income taxes and the trust fund taxes you already failed to pay. It’s a financial snowball that can quickly spiral out of control, leaving you personally liable on multiple fronts. And remember, the IRS enforces this through the Trust Fund Recovery Penalty (TFRP), which allows them to go after your assets.

Payroll Taxes Aren’t Like Other Bills

Payroll taxes can’t be delayed or renegotiated, unlike rent or vendor payments. Falling behind triggers severe consequences, including escalating penalties, mounting interest, and personal liability. Ignoring these obligations only makes the hole deeper and more complex to climb out of.

Stop Digging and Take Action

If you’re struggling to pay your payroll taxes, the first step is to stabilize your finances. Yes, this may mean deciding to reduce staff or drastically cut other expenses. It’s a painful process, but stopping the financial bleeding is essential.

Once you’ve stabilized, tools can help you address your tax debt. The IRS offers Installment Agreements to break your debt into smaller, more manageable payments. If your financial situation is especially dire, you might qualify for an Offer in Compromise, allowing you to settle your tax liability for less than the total amount owed.

Act Now to Protect Your Future

The longer you wait, the worse things will get. Penalties and interest will pile up, and the IRS will dig into your financial history to uncover any personal use of trust funds—adding more debt in the form of taxable income. By taking action today, you can stop the damage, repair your financial situation, and build a more stable future.

Remember: The sooner you stop digging, the sooner you can start climbing out of the hole.

How to Document Reasonable Compensation for Shareholders

If you’re a shareholder in an S Corporation, ensuring that your compensation is reasonable is crucial to avoid IRS scrutiny. But how do you calculate and document reasonable compensation? Follow this straightforward process to establish a well-supported, defensible compensation figure using publicly available data and clear documentation.

Step 1: Download State Wage Data

The Department of Labor (DOL) releases annual wage data by state each May. This dataset provides a comprehensive breakdown of average wages for different occupations and industries in your area. Start by downloading this data and importing it into a spreadsheet. This will serve as your baseline for determining reasonable pay rates.

Pro Tip: Focus on your specific state to ensure your compensation aligns with local economic conditions. Bookmark the DOL website or set a reminder each May to update your data.

Step 2: Identify Major Duties

Make a detailed list of your primary job responsibilities as a shareholder-employee. Most shareholders in S Corporations wear multiple hats, so aim to capture 4 or 5 major functions you perform regularly. For example:

  • Sales and Business Development
  • Operations Management
  • Financial Oversight
  • Customer Support
  • Administrative Tasks

Defining your roles ensures you match each duty to an appropriate wage category.

Step 3: Look Up Average Pay Rates

Using your spreadsheet of DOL wage data, find the average hourly rate for each of your identified duties. For instance:

  • Sales and Business Development: $45/hour
  • Operations Management: $50/hour
  • Financial Oversight: $55/hour
  • Customer Support: $25/hour
  • Administrative Tasks: $20/hour

Make sure the rates reflect your state and industry. If necessary, adjust based on the experience required for the role.

Step 4: Allocate Your Time by Duty

Next, estimate your time on each duty during a typical workweek. Break this down as a percentage, ensuring the total does not exceed 40 hours per week. For example:

  • Sales and Business Development: 40% (16 hours/week)
  • Operations Management: 25% (10 hours/week)
  • Financial Oversight: 15% (6 hours/week)
  • Customer Support: 10% (4 hours/week)
  • Administrative Tasks: 10% (4 hours/week)

Allocating your time helps demonstrate how your compensation correlates with the value of your work.

Step 5: Calculate Total Compensation

Now, multiply the hours spent on each duty by the corresponding hourly rate, then sum the totals:

  • Sales and Business Development: 16 hours × $45/hour = $720
  • Operations Management: 10 hours × $50/hour = $500
  • Financial Oversight: 6 hours × $55/hour = $330
  • Customer Support: 4 hours × $25/hour = $100
  • Administrative Tasks: 4 hours × $20/hour = $80

Total Weekly Compensation: $1,730
Annualized Salary (52 weeks): $1,730 × 52 = $89,960

This total represents a well-documented, reasonable compensation figure that reflects your duties and local wage standards.

Why This Approach Works

By following these steps, you’re creating a clear paper trail that aligns with IRS guidelines. Using third-party wage data, documenting job duties, and allocating time builds a solid defense if your compensation is questioned. It’s proactive and transparent and ensures you remain in compliance.

IRS Agents are used to seeing taxpayers with no documentation. Yours does not have to be pretty to be adequate.

Bonus Tip: Keep this documentation updated annually and include it with your corporate records to show consistency.