Jacksonville CPA | More Money From Business

Hello, my name is brandon and I’m the president of Mineva, Jacksonville based tax and accounting firm. We are different than most Jacksonville CPA firms in that we have our clients’ best interest in mind and we care about helping them achieve their goals. Today we’re going to talk about the importance of owner’s salary in your business. Why so many entrepreneurs are not taking a proper salary and distributions are obscuring their view of net income. I’ve seen so many entrepreneurs look at their financial statements and Brag about their high profit margin when in reality they are not paying themselves a market based wage and their profit margin is much lower than they believe.

Owner’s salary is a highly contested topic and one that is highly audited by the irs. You need to make sure that you get this right. If you’re looking for a Jacksonville based accounting firm, Mineva can help you with this issue. There are very few Jacksonville cpas that will take the time and effort to make sure that you are covering this topic adequate adequately. I’ve always felt that accountants make finances too hard to understand, so that meant eva, we tried to use a simple way and use business owner speak to make the concepts easily understandable. I do this because I am an entrepreneur myself and not just an accountant, so let’s get to the topic owner’s salary. As the owner of a corporation, a small business just typically set up as an s corporation.

The irs requires if you perform services for the corporation, that you pay yourself a market based wage. If you do not do this, you run the risk of being audited by the irs and have the irs force you to reclassify all the distributions that you have taken from your business as a salary. And believe me, this not a situation you want to get into. I’ve seen this before and the dependent penalties and interest can be as much as 200 percent of the original tax that you would have paid. Many business owners try to cut corners and pay them selves have very minimal or no salary. This is asking for trouble with the irs. A few Jacksonville CPA firms will help you with this. With this issue at Mineva. We want to make sure that you get it right. So I’ve had entrepreneurs asked me, can you give an example of how paying yourself a below market salary distorts financial numbers and a good example is two brothers that are co owners in a business, they were patting ourselves on the back because they weren’t achieving an income that was more than 20 percent of sales or at least they thought they were.

They were paying themselves a very small salary and taking distributions out of the company after I calculated their salaries in distributions together and treated this number as if it were a true market base wage. They were actually only making five percent before taxes. This happens a lot in businesses. Believe me, most business owners think that they’re overpaying themselves, but the vast majority are underpaying themselves. I think this is an entrepreneur sin where they want to show off their feathers in public and they use gross sales numbers and net income for their, their extravagant display, but sales figures in net income or irrelevant of business owners don’t include a true market based wage and their financials, so how do we accomplish this and make sure you were paying a proper wage. A good rule of thumb is to ask yourself, what could I pay someone to run my position to properly carry out the duties that I do if I were to become disabled, what would I pay them? That is a good starting point. I recommend for all entrepreneurs that are doing this, that are trying to calculate their salary to do significant research, to do significant research and document the reasoning behind their salary as this will help if you were ever in an audit. For some business owners, I have found they can justify taking a smaller salary than others as they are not as active. For instance, a Jacksonville CPA

recommended one of my clients to pay a salary that is, that was 50 percent greater than they needed, so this sometimes occurs as well, but more often than not, I see a business owner not paying sufficient salary rather than overpaying. Another situation that I’ve seen are to entrepreneurs that form of partnership and think that they should all always have an equal salary. When doing this, you have to sit down and make sure everything is in writing. At the beginning, I had a client recently who was starting a business with a partner. One client was going to, excuse me, let me say one partner was going to fund the business and only provide minuscule management tasks. The other partner was not going to provide any funding, however, they were going to be running the day to day operations of the business and putting in the proverbial sweat equity. What I recommended for them is if if they wanted to do a 50 slash 50 partnership that the owner that was putting in the sweat equity would get a salary, a market base wage, and the owner that was not performing services and was only providing funding would not be paid a wage.

However, the profits would be split 50 50. This means that partner one would actually be getting more money from the business. This is because he’s putting in more effort now. This is just an example and if you are in a partnership, you can draw it up however you would like, but make sure that it’s equitable and that it’s in writing and it’s agreed to by all parties before starting as I have seen other clients come in after the fact with huge problems and misunderstandings because items were not settled on and written down on the front side, I, Jacksonville, CPA that is worth his salt, will help you through the issue of proper compensation. Jacksonville CPA I all always recommend doing salary research on salary.com and there is a good company named RC. Reports are c stands for reasonable compensation. They partner with some Jacksonville Cpas to give client discounts on their reports. It’s a very good company and it’s something that you would definitely want if you were ever in a reasonable compensation audit.