This chapter covers cash compensation as an employee benefit. Advantages and disadvantages of cash versus non-cash compensation are reviewed. The reasonableness of compensation is discussed in the tax implications section, along with factors in determining what is considered reasonable. | Cash that employee receives in the year that it was earned Forms basis of comparison with other forms of benefits for deciding level of some types of pension or life insurance plans What is it? Copyright 2009, The National Underwriter Company When it is advantageous “C” corporation offers greater opportunity to plan cash compensation unincorporated businesses and “S” corporations pass all income and loss directly through to owners When is it indicated? Copyright 2009, The National Underwriter Company Provides certainty for employee Sets employee’s status in company and community Important part of financial planning for shareholder-employees of closely held corporations Easy to budget, known costs Avoid administrative complexity Advantages Copyright 2009, The National Underwriter Company Cash paid currently is subject to current taxation Cash compensation must meet reasonableness test for various tax issues Disadvantages Copyright 2009, The National Underwriter Company Employer’s tax deduction for employee pay is disallowed if employee compensation fails IRS reasonableness test Generally, no deduction for compensation in excess of $1,000,000 in publicly held corporation to CEO or 1 of 4 highest compensated company officers Tax Implications: Reasonableness of Compensation Copyright 2009, The National Underwriter Company If amounts paid (and deductions taken) are relatively high, wise to: determine compensation level before earned write and sign employment contracts document salary decisions in minutes of director’s meetings document relevant factors in deciding compensation level Tax Implications: Reasonableness of Compensation Copyright 2009, The National Underwriter Company Compensation paid to executives in comparable positions for comparable employers Employee qualifications for job Nature and scope of duties Size and complexity of business Tax Implications: Factors in Determining Reasonableness of Compensation Copyright 2009, The . | Cash that employee receives in the year that it was earned Forms basis of comparison with other forms of benefits for deciding level of some types of pension or life insurance plans What is it? Copyright 2009, The National Underwriter Company When it is advantageous “C” corporation offers greater opportunity to plan cash compensation unincorporated businesses and “S” corporations pass all income and loss directly through to owners When is it indicated? Copyright 2009, The National Underwriter Company Provides certainty for employee Sets employee’s status in company and community Important part of financial planning for shareholder-employees of closely held corporations Easy to budget, known costs Avoid administrative complexity Advantages Copyright 2009, The National Underwriter Company Cash paid currently is subject to current taxation Cash compensation must meet reasonableness test for various tax issues Disadvantages Copyright 2009, The National Underwriter Company
