The IRS requires that compensation must be reasonable for the personal services actually rendered by a shareholder-employee. This reasonable compensation standard can be applied to adjust compensation that is either too high or too low.

There is no rigid set of rules for measuring the reasonableness of compensation. No definition of “reasonable” is contained in the Code; the regulations provide only that reasonable compensation is an amount paid for like service by like enterprise under like circumstances. Court cases have shown, however, that each situation must be resolved based on its unique facts and circumstances. Some Tax Court decisions have focused on the following five factors:

1. the character and financial condition of the corporation;
2. the role the shareholder plays in the corporation, including the employee’s position, hours worked, and duties performed;
3. the corporation’s compensation policy for all employees and the shareholder’s individual salary history including the corporation’s internal consistency in establishing the shareholder’s salary;
4. how the compensation compares with similarly situated employees of similar companies; and
5. whether a hypothetical independent investor would conclude that there is an adequate return on investment after considering the shareholder’s compensation.

In these and other cases, the courts have also considered additional factors in deciding whether the amount of compensation is reasonable, including:
1. the employee’s qualifications;
2. the size and complexity of the business;
3. a comparison of salaries paid to sales and net income;
4. general economic conditions;
5. comparison of salaries to shareholder distributions and retained earnings;
6. compensation paid in prior years;
7. the corporation’s dividend history;
8. whether the employee and employer dealt at arms’ length; and
9. whether the employee guaranteed the employer’s debt.

The court decisions confirm that no single factor controls, but rather a combination of the factors must be considered. Furthermore, these factors are not all-inclusive (and may not be given equal weight). Fewer or additional factors may be appropriate, depending on the surrounding facts and circumstances.

Health coverage legislation enacted this year (March 23, 2010) includes a Small Business Health Care Tax Credit to help small businesses and small tax-exempt organizations afford the cost of covering their workers. The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. An enhanced version of the credit will be effective beginning in 2014.

Eligibility Rules
• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.
• Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit
• Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
• Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Three Simple Steps for Employers to Qualify
To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on the IRS fact sheet (see next page)

http://www.irs.gov/newsroom/article/0,,id=220809,00.html INSTRUCTIONS

http://www.irs.gov/pub/irs-news/health_care_postcard_notice.pdf SAMPLE POSTCARD

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.
In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf 3 STEP WORKSHEET

In this guest posts, Russell J. White, shares some insights on success and failure.

Did the leaders of Enron start out trying to lie to their investors? Did Bernie Madoff intend on defrauding those who trusted and believe in him? Did you wake up this morning intent on getting so upset in a 2 pm meeting where you said things in anger that could cost you your job? No, but it happens every day.

Have you ever asked how did we get here? 

Every day we are faced with infinite possibilities and hundreds of decisions. The path those decisions leads us on has us end up where we brought ourselves to. Without question there is randomness and luck involved in the decisions we face. Read Malcolm Gladwell’s excellent book Outliers on the impact fortune has on our lives.

What we do with those decisions is our choice and ultimately leads us to face the next set of choices along that path. Most of us have faced decisions to try cigarettes, alcohol, drugs, illicit activity, and to cheat, to lie, to over-indulge, we get to prioritize our lives as we decide. These become significant choices that significantly impact who we become. Each day we set our path face critical moments that propel us along.

How have the decisions you made as a teenager impacted you today?

What did you decide six months ago that has you now reaping those results?

There is no one path to success or one path to ruin. We choose our own way. The critical moments occur in considering the choices you make on each decision. With each decision ask yourself, “Does this get me to where I want to go?” Whether it is personal choices or professional choices, you need to consider which direction each step takes you.

Know where you want to go.

Know the direction you want to take to reach that end point.

With each step make progress along the path of your choosing.

I often hear people wanting to experience success and they always ask, “How do I get there?” You can’t borrow another person’s playbook because it won’t fit your decisions you face. You achieve success with each step in the right direction. Choose your decision steps with the desired result in mind.

Russell J. White, President of PinnacleSolutions.org is one of America’s leading business growth strategists. He is an author, consultant, international speaker and business expert on leadership, marketing and growth strategies. Since 1991 Russell has worked with hundreds of clients.  He has been a frequent guest on television and radio. He is considered both a motivational speaker and a business expert.  Russell also writes and publishes the Grow Your Business blog.  Contact him at 803-984-9448 or RJWhite@PinnacleSolutions.org

I think it is time for a little lesson on 1099′s for everyone.  Forgive my rant, but every year people start begging for their 1099′s in early January.  They say they “need their 1099 to file their taxes.”  This is simply untrue and tells me that many of them are probably cheating on their taxes.

A 1099-MISC form is issued to a person or unincorporated entity that is paid more than $600 in the calendar year.  If they pay you less than $600, the payor does not have to issue a 1099-MISC but that does not mean it is not income to the receiving party.  The purpose of the 1099 is to notify the IRS that this person should be claiming the income and paying taxes on it.  The IRS then matches this amount reported to the proper return and if it is not reported, the IRS sends out a lovely balance due notice.  Are these individuals that “have” to have a 1099 in order to do their taxes excluding the income from the ten vendors that paid them $500 each that were not required to send a 1099?

Independent contractors are self-employed are businesses whether they know it or not.  Just like any other business, they should keep a proper set of books and records to substantiate their income and expenses.  They are also eligible to deduct qualifying expenses against the income before paying taxes on it.

With electronic filing being done for most returns today, no statements like W2s have to be submitted to the IRS with the returns.  Even with paper filing, you only attach statements showing how much was withheld and remitted to the IRS.  1099s do not normally have withholding so they are not required and never have been required to be submitted to the IRS.

So when I hear someone asking for their 1099, I hear a business owner saying “I do not keep books and records.  I do not keep up with my business as a business.” and “I plan to only claim the income that is sent to the IRS.”  This is a recipe for pure trouble and is the reason the IRS scrutinizes self-employed filers so much.  The truth is that this one the highest concentration of tax cheating that exists in our tax system today.

Do yourself a favor.  If you are a business owner, require all potential 1099 vendors to complete the form W-9 from the IRS before they receive any payments from you.  If they are planning to cheat on their taxes, remember that they may not always be the best vendor for you.  Have a backup!