“Four Ways Business Owners Can Ensure Fair Pay for Themselves”

1. Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
2. Document the duties you perform in your role and the time spent on those duties, as well as your skills, expertise and compensation history.
3. Have a formal written employment contract that outlines the terms of your compensation.
4. Be sure the compensation you take out of the corporation is proportional to the income generated by your business. The minutes of the corporation’s board of directors’ meetings should contemporaneously document the reasons for compensation paid, including any increases in compensation to make up for earlier years in which it was low. The minutes should cite any executive compensation or industry studies that back up the compensation amounts. It’s important to avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders, as this may be treated as a disguised dividend by the IRS. Additionally, if the business is profitable, it is advisable to pay at least some dividends to avoid the impression that the corporation is trying to pay out all of its profits as compensation.

For questions or concerns about compensation or any other tax-related matters, contact NKSFB at taxinsights@nksfb.com or Richard Welling at rwelling@nksfb.com.

Four Ways Corporate Business Owners Can Help Ensure Their Compensation Is “Reasonable”