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Welcome to the inaugural edition of Pottscast, your source for trusted business advice. I’m your host David Potts.
Pottscast is produced by Potts and Company Certified Public Accountants.
So what is Pottscast? Pottscast is a platform to communicate with our clients and friends and this podcast is the first plank in the platform. Additional planks, or information channels, will include a blog and an e-mail newsletter.
Although Pottscast the podcast and the blog will be available on the internet, it will not be publicized to a wide audience. Again, its purpose is to deliver high quality content for the benefit of Potts and Company’s clients and friends. So if you are not a client or friend of Potts & Company and you stumble across our podcast and blog, it’s OK to listen. But any advice or recommendations you pick up from Pottscast should be discussed with your own CPA before implemented. If you don’t have a CPA, Potts & Company will be glad to work with you. You can call us at 479-648-2846 or email me at firstname.lastname@example.org.
If you are a client of Potts & Company, keep in mind that our podcast discussions, our blog posts, and the articles in our newsletter will be general in nature and not necessarily specific to your own situation. If you feel that a topic relates to you, please make an appointment to discuss the facts and circumstances of your specific situation with me, Joe, Cliff, Leacretia, or Debbie.
What should you expect from Pottscast and why should you listen? What’s in it for you?
Have you paid yourself a reasonable salary in 2012?
The instructions for the S Corporation income tax return for page 1, line 7, Officer’s Compensation, begin with “Caution! Distributions and other payments by an S Corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”
Reasonable compensation for S Corporation officers has long been a sore spot for the IRS. For years, many S Corporations have paid officers through distributions from the corporation to avoid having to pay employment taxes (Social Security and Medicare taxes, Federal Unemployment taxes). I expect the reason the instructions start off with “Caution!” means they are on the lookout for non-compliance.
Reasonable compensation is a less than well-defined term. There is no chart to look up how much you should pay yourself. For corporations that did not elect to be taxed as an S Corporation, the IRS gets excited when the officers’ compensation is unreasonably high. For S Corporations the IRS gets excited when the officers’ compensation in unreasonably low.
Here are the factors the IRS tells you to consider in determining a reasonable salary:
New in 2011 to all federal business tax returns (i.e. Schedules C, E, F and Forms 1065, 1120, 1120S, etc.) was a box asking whether any payments were made during the year that would require Form 1099 to be filed and a box asking whether or not you filed all required Forms 1099. It is becoming more and more important that you comply with all l099 reporting requirements. When you sign your tax return, you are stating that, under penalties of perjury, to the best of your knowledge and belief your tax return is accurate and complete. If all Forms 1099 are not filed, you could be held liable in the event of an IRS audit.
This letter is geared towards Form 1099-MISC, the most common Form 1099. Forms 1099-INT and 1099-DIV meet the many of the same requirements, but must be sent to everyone you paid $10 or more.
As a reminder, you need to send a Form 1099 to all sole proprietors, partnerships, and LLCs that you paid rent or royalties, as well as any independent contractors and attorneys that you paid for services in 2012. Incorporated vendors, except for attorneys, are exempt from this requirement.
You are only required to send a Form 1099 to anyone meeting the above requirements if you paid them $600 ($10 for royalties) or more in 2012. Please review your records to see if you have any vendors who qualify.