You are now working in a business funded by the Rollover Business Startups (ROBS) structure and it’s up to you to determine a reasonable salary for your position. While you do not want to be underpay yourself for any services performed, if you pay yourself excessively, the excess pay will not be allowed as a deduction. In this article, we provide a few strategies to ensure that your salary is considered reasonable by the IRS.
The Rollover Business Startup solution is an avenue many entrepreneurs take in order to fund a new or existing business with their retirement funds. Furthermore, the structure (ROBS for short), allows individuals to participate in the business and even earn a salary. Entrepreneurs can do all of this without triggering the IRS prohibited transaction rules.
What Makes ROBS So Special
Here is a little background information on the ROBS structure for those who are learning this term for the first time:
The rules under Internal Revenue Code (IRC) section 4975 disallow individuals from investing in transactions with disqualified persons, which includes themselves. The rollover business startup solution is so attractive among entrepreneurs due to an exception to the prohibited transaction rules, which allows a 401(k) plan to purchase stock in a C corporation. This is the only legal way that an individual can use his/her retirement funds to invest in a business he/she will be personally involved in. There is the Solo 401(k) loan, however the loan limits individuals to $50,000 or half of their account value (whichever is less). So, if you need more than the Solo 401(k) loan permits, you will have to find the money elsewhere.
Read More: What is Rollover Business Startups?
Factors to Determine a Reasonable Salary
You have to ensure that your business is IRS compliant and one of the ways to do this is to be an employee of a business that provides a legitimate service. Once the business generates compensation, you can earn a salary. You have to prove to the IRS that the pay is reasonable depending on the circumstances that existed when you contracted the services – not the circumstances when the reasonableness of the salary was in question.
Look at the following facts to determine if the pay is reasonable:
- Duties you perform
- Type/amount of responsibility
- Complexity of your business
- Time required to complete tasks
- Cost of living in the area
- Pay policy for your employees
- Education and/or experience required for the position.
Do a Market Salary Comparison
Of course, you can perform a market salary comparison to find out the salary for similar positions. You can easily do this by going to a salary website, such as salary.com, glassdoor.com or indeed.com. This will help you see the salary of similar roles at other companies (in some cases, it also gives you a good idea of the employee benefits).
Work with a ROBS Provider
Finally, you can work with a ROBS provider. You should generally work with the provider who established your ROBS structure and provides ongoing assistance, such as IRA Financial. One of the main concerns the IRS has with the ROBS structure is the lack of compliancy among participants. In order to truly ensure compliancy, work with a ROBS provider to determine a reasonable salary for your position.
Determining a reasonable salary for your position after employing the ROBS structure is just one of the many steps to staying IRS compliant.
The ROBS structure is a great way for entrepreneurs to see their business ventures come to fruition. However, it is very complicated to navigate, which is why you should always work with a trusted ROBS provider who has had years of industry experience and can provide ongoing maintenance.