Quickly Untying The Reasonable Compensation Knot

There are two ways to take money out of your medical spa practice: a salary, or distributions. The salary portion incurs payroll taxes, but distributions do not. When you file taxes as an S-Corp, you are playing the role of both employee and employer.

When it comes to paying yourself through an S-Corp, this is a very gray area with the IRS. It’s called “reasonable compensation”, but the question everyone has is, “what is reasonable?”

This brings us to the QBI Deduction. It’s a great benefit to small businesses by allowing them to deduct up to 20% of their qualified business income. This deduction is based on how much salary the company pays.

The more distributions you take, the lower your W2 salary will be which limits your QBI deduction. You want what you’re paying on the salary to be as low as possible while flying under the IRS radar, but if it’s too low then you’re going to limit the QBI deduction you get. There is a sweet spot that you want to hit. This requires finesse.

Having the right person on your team to guide you is imperative and optimizing your salary significantly helps your profits at the end of the year.

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- Speakeasy Bookkeeping