As an independent physician or CRNA operating as an S-corporation, understanding and establishing reasonable compensation is crucial. It ensures compliance with IRS guidelines, minimizes audit risks, and optimizes your tax strategy. This guide will walk you through the essentials of determining reasonable compensation, including DIY approaches and professional tools.
Why Reasonable Compensation Matters
Reasonable compensation is the salary you pay yourself as an S-corp owner-employee. This salary is subject to payroll taxes, while the remaining profit distributions are not. Underpaying yourself to reduce payroll taxes can raise red flags with the IRS, resulting in penalties and back taxes. On the other hand, overpaying yourself could unnecessarily increase your tax burden.
How to Determine Reasonable Compensation
The IRS evaluates reasonable compensation using a "facts and circumstances" approach. Here are some key factors:
Role and Responsibilities: Your compensation should reflect the value of the services you provide to your S-corp, considering duties like patient care, administrative tasks, and business management.
Market Data: Research industry standards for your role and location. This can include consulting sources like:
Bureau of Labor Statistics (BLS) for median hourly wages by occupation and location.
IRS Guidance on Reasonable Compensation for compliance rules and considerations.
Business Revenue: Your compensation should align with your practice’s profitability while leaving room for growth and reinvestment.
DIY Methods for Establishing Compensation
If you're taking a do-it-yourself approach, consider these strategies:
Time Study: Document the hours spent on clinical and administrative tasks. Multiply these hours by a reasonable hourly rate derived from BLS data or similar sources. For example, if you work 40 hours a week and the median hourly rate for your specialty is $100, your annual salary might start around $208,000.
Comparable Role Analysis: Look for job postings or salary surveys that reflect similar roles in your specialty and region.
Tools and Resources for Assistance
While a DIY approach can work, many independent professionals find value in professional tools and services:
RC Reports: Provides independent and defensible analyses of reasonable compensation based on factors like your specialty, experience, and location.
IRS Guidelines: A general FAQ to clarify IRS expectations.
Hire a CPA: A professional who works exclusively with physicians and CRNAs will have the tools and knowledge necessary to substantiate your wage
Case Study: Balancing Salary and Distributions
Consider a CRNA in California operating as an S-corp with $400,000 in annual net profit. After researching BLS data and conducting a time study, the CRNA sets a reasonable salary of $200,000. This leaves $200,000 for distributions, reducing payroll taxes while staying compliant with IRS standards.
Common Pitfalls to Avoid
Setting Salaries Too Low: This can trigger IRS audits and result in back taxes and penalties.
Over-reliance on Distributions: While distributions are tax-advantaged, neglecting to pay yourself adequately can jeopardize compliance.
Ignoring Industry Benchmarks: Failing to align your salary with market standards weakens your defense in case of an audit.
Partner with an Expert
Determining reasonable compensation is both an art and a science. While tools and guidelines help, every situation is unique. At Ken Eremita CPA, Inc., we've probably run an analysis on for someone in your specialty before and offer a Reasonable Compensation Analysis to all of our clients.
If you're starting up a new practice, we offer special rates that include the RC analysis, payroll setup, coordination of retirement plans and more. Explore our tax and accounting plans today.
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