D. Rhodes, CPA, Writer and Editor
Watch our detailed video below for in-depth analysis of court cases, specific documentation requirements, and implementation strategies to ensure your family employment arrangement withstands IRS scrutiny.
Most business owners believe their tax strategies for 2024 are locked in after December 31st. However, the IRS provides a powerful but lesser-known option through Revenue Procedure 2013-30 that could significantly reduce your 2024 tax burden - even in 2025.
Understanding the Opportunity
Business owners face two distinct sets of taxes: income taxes (federal and state) and payroll taxes (Social Security and Medicare, totaling 15.3%). While income taxes are familiar to most, it's the payroll tax burden that often surprises business owners, as they're responsible for both the employer and employee portions.
Through a late S-Corporation election, business owners can potentially reduce their tax burden substantially. For example, a business with $126,000 in profit could save over $9,000 in taxes through proper implementation of this strategy.
The IRS Framework
The IRS provides this opportunity through specific guidelines:
A 3-year and 75-day window from the desired effective date
Clear eligibility requirements under Rev. Proc. 2013-30
Specific documentation needs outlined in IRS Technical Memoranda
Requirements for reasonable compensation structured through the Assignment of Income Doctrine (IRM 4.10.4.3.2.7)
Key Requirements
To successfully implement this strategy, businesses must:
Meet eligibility criteria as of January 1, 2024
Demonstrate intent to operate as an S-Corporation
File Form 2553 within the allowable timeframe
Provide reasonable cause for late election
Implement proper payroll structures, even retroactively
Compensation and Documentation
The IRS scrutinizes reasonable compensation closely. Factors considered include:
Industry standards
Time commitment
Work complexity
Business revenue
Comparable compensation in similar businesses
Documentation must show the business, not the individual, as the income earner. This includes:
Contracts in the business name
Proper payment structures
Clear operational documentation
Justified compensation levels
Implementation Timeline
For 2024 tax year election, businesses should:
Immediate Actions:
Gather 2024 business documentation
Calculate reasonable compensation
Prepare retroactive payroll documentation
Within 30 Days:
File Form 2553
Process retroactive payroll
Update business contracts
Within 60 Days:
Complete quarterly payroll filings
Issue W-2s
Prepare business returns
Common Pitfalls to Avoid
The Tax Court case Fleischer v. Commissioner provides crucial warnings about implementation mistakes:
Operating under personal rather than business name
Improper documentation
Incorrect income attribution
Inadequate business structure maintenance
Next Steps
While the technical deadline extends into 2027, early implementation reduces scrutiny and complications. Business owners should:
Review current business structure
Assess potential tax savings
Gather required documentation
Consult with qualified tax professionals
Remember: Our ultimate goal is to help you save time and money, while building wealth and legacy.
The choice is yours, but the clock is ticking. Reach out today so we can help get you from where you're at, to where you want to be. Your move boss.
*This article provides general information, not individual tax advice. Tax situations vary; consult with a qualified tax professional, like myself, for advice specific to your circumstances.
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