This is a really good point. How exactly does the IRS determine what's "reasonable compensation" though? Is there some formula or percentage they use?

There's no specific formula or percentage the IRS uses to determine reasonable compensation. They look at several factors including your qualifications, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, and what comparable businesses pay for similar services. Industry surveys and salary websites can provide benchmarks. For example, if you're operating as a consultant and taking $30K in salary while distributing $200K, that would likely raise flags. The best approach is to document how you determined your salary amount - gather data on comparable positions in your industry and geographic area, consider your specific duties, and keep records of your decision-making process in case of an audit.

I haven't been using that worksheet specifically. Honestly, I've been relying on my tax software to track it, but I'm not sure it's doing it correctly given all the specialized circumstances with a single-member LLC that elected S status. I'll definitely check out that worksheet. Is it complicated to fill out if I have several years to catch up on?

It's not overly complicated, but it does require information from your previous tax returns. You'll need your initial capital contributions, all reported income and losses from prior years' K-1s, any additional capital contributions, prior distributions, and certain adjustment items like charitable contributions. If you're catching up multiple years, I recommend starting with the earliest year and working forward. Each year builds on the previous year's ending basis. The worksheet is in the instructions for Form 1120-S (not in the form itself). It helps ensure you're considering all basis adjustments, including those often overlooked like nondeductible expenses and tax-exempt income. These items affect basis but are often missed by basic tax software, especially if you're using consumer-grade programs rather than professional tax preparation software.

Do you think there's any legitimate way my coworker and I could structure this that wouldn't violate policies? What if he just gave me the money as a birthday gift with no strings attached, and then months later I happen to donate to that charity?

Even with separation in time, the arrangement is still designed to circumvent company policy, which is problematic regardless of how it's structured. Most corporate ethics policies look at intent, not just technical compliance. A legitimate alternative would be for your coworker to donate their full intended amount directly to the charity, and you could separately donate to the same charity if you genuinely support their cause. This way, both donations would be legitimate, the company match would apply appropriately based on actual employee giving, and there would be no ethical concerns. The charity might receive slightly less overall, but without any risk to your employment or tax standing.

Great point! When I worked in nonprofit development, we had several approaches for donors in this exact situation. Some options included spreading the donation across multiple tax years, involving family members who could make legitimate donations, or exploring donor-advised funds which sometimes have their own matching programs.

That's good to know about the Social Security cap, though like you said we're both under it individually. I didn't realize the Child Tax Credit could be that significant! Would we need to adjust our W-4s again after the baby is born to account for the credit, or does that automatically reduce what we owe at tax time?

You'd need to update your W-4s again after the baby is born to account for the Child Tax Credit. It doesn't happen automatically during the year - it would only reduce what you owe when you file your taxes otherwise. On your W-4, you would indicate the dependent in Step 3, which would then reduce your withholding throughout the remainder of the year. When you update your W-4s, you'll probably want to do it soon after the baby is born to maximize the withholding adjustment for the rest of the year. Just be aware that the Child Tax Credit begins to phase out at higher income levels (starts phasing out at $400,000 for married filing jointly), but based on your income you should still qualify for at least a partial credit.

I second this approach. With our W-2 income plus investment income, quarterly estimated payments have been a lifesaver. The peace of mind knowing we won't have a surprise tax bill is worth the extra effort. Just make sure you're paying at least 100% of last year's tax liability (or 110% if your AGI was over $150,000) to avoid underpayment penalties.

Thank you! This is super helpful. Do you know if there's any specific form I should use for the detailed statement about the car's value, or should I just include a regular letter with my documentation?

There's no specific IRS form for an asset value explanation. Just create a simple letter titled "Vehicle Valuation Statement" that includes: - Vehicle details (year, make, model, mileage) - Description of current condition and issues - List of all supporting documentation you're including - Brief explanation of why you believe the value is what you're claiming Keep it factual and concise - about one page maximum. Include this in your OIC package right behind your Form 433-A (Collection Information Statement) where you list the vehicle.

I've heard this too. My tax pro said the IRS internal guidelines actually reference NADA more often than KBB. Worth checking both!

Does each preparer need an EFIN too, or just a PTIN? And do they need to be employees or can they be contractors?

They only need their own PTINs, not separate EFINs. The EFIN belongs to your business/practice, while PTINs are for individual preparers. You can have multiple preparers using one company EFIN. As for employment status, you can have them as either employees or contractors depending on how you structure things. Independent contractors are simpler administratively but the IRS has specific rules about who qualifies. If you're directing when and how they work, they're probably employees. Many of my preparers are seasonal employees during tax season only, which works well for both parties.

Those "virtual EFIN" services are just fancy marketing for the illegal practice of renting EFINs. There's no such thing as a "virtual EFIN" in IRS terminology. It's just credential renting with extra steps. I know someone who got caught up in one of those schemes last year and lost their ability to prepare taxes altogether. The IRS does monitor unusual patterns of EFIN usage and they've been cracking down hard.