Paul Hamann is the Founder of RCReports, a service that provides accurate insights into Reasonable Compensation for closely held businesses to ensure your clients remain compliant, minimize risk, and realize maximum payroll tax savings.
Paul Hamann is the Founder of RCReports, a service that provides accurate insights into Reasonable Compensation for closely held businesses to ensure your clients remain compliant, minimize risk, and realize maximum payroll tax savings.
Paul sits down with Gary to share why he started RCReports, the three most common myths people believe about reasonable compensation, and how this service can reveal if clients are overpaying on their taxes.
Listen now to learn how RCReports can help accounting and bookkeeping firms offer trusted advisor services to their clients.
Learn more about RCReports: RCReports.com
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Gary DeHart
All right. Welcome to another episode of Accounting Insiders. My name is Gary DeHeart. I'm the publisher of Insightful Accountant and host of our podcast Accounting Insiders. And today, I'm joined by Paul Hamann of RCReports. Paul, welcome. Thanks for joining us.
Paul Hamann
Thanks for having me on, Gary. I appreciate it.
Gary DeHart
Yeah, Paul is, is digitizing in from the greater Denver area. I'm in the greater Atlanta area. My weather here is cool. I imagine yours is gonna be somewhat cool. What do you what are you doing out there?
Paul Hamann
First snow is headed this way?
Gary DeHart
Oh, is it really? Okay. Well, good luck with that. Now that was that one that'll last for like half a day and then it's gone.
Paul Hamann
Yeah. It'll be one of those. But it's about that time of year.
Gary DeHart
Right. Right. So why you live there, right?
Paul Hamann
Yes.
Gary DeHart
All right. I always like to start with a really, really stupid question that has no bearing on what we're going to talk about. But so with you being out there, we'll have to ask. We'll go with season. What's your favorite season being out in the out in Denver?
Paul Hamann
Fall, absolutely. The weather's most temperate. The hiking is the best. And the colors here are unbelievable.
Gary DeHart
Yeah, yeah. No. Do you fish? Do you fly fish?
Paul Hamann
I don't I do fish fly fishing isn't something I've had an opportunity to get in too much. But it does look. It's like something I had to I had to try. How about yourself?
Gary DeHart
I love it. It's my favorite thing to do in the world. But don't get to do it nearly enough. And would love to do it out there. I've never been out there to fly fish. My brother has been out west and fished a lot out there. But I've just not had the opportunity. So..
Paul Hamann
There are so many gold metal waters here. I have so many friends that fish them and just don't just they can't say enough. So yeah, definitely put it on your to do list. Yes.
Gary DeHart
Sounds like a business trip needs to be made?
Paul Hamann
Absolutely.
Gary DeHart
All right. Well, before we before we burn up all of our time here talking about fishing and fun stuff. Let's tell me just a little bit about who you are. And again, company that you want to founders, I don't remember that you're one of the founders right of RC reports RC standing for reasonable compensation. So just give me like the 30 seond bio on Paul and then kind of the 30 seconds on RC reports. And we'll jump in.
Paul Hamann
Sure. So prior to founding RC reports, and by the way, this is our 10th year anniversary.
Gary DeHart
Okay, hey, congratulations what date?
Paul Hamann
That's, that's a little bit. We're trying to figure that out. It's either a date in November or a date in December, depending on what we use as our anchor. Because you know, when you start, you don't really think about what date you're going to celebrate this 10 years.
Gary DeHart
We'll be 10 in June, June 13, actually is when we officially launched so...
Paul Hamann
Oh, very nice. Congrats. Yeah. So prior to founding RC reports, my world is revolved around human resources and executive search, and a lot of compensation consulting and plans. There's a spike in interest from the IRS in the field of reasonable compensation starting just after 2005. So 20006, 7, 8 That happened to coincide with I don't know if your call there's some kind of a recession that happened back in 2008. . So I had some time on my hands. And I began doing specialized on compensation engagement engagements on reasonable compensation. Unbelievably frustrated, how long it took long story short, in 2010, we began looking at building a feature or a solution really was for myself, but then deciding if it would be something other people would be interested in. And that started in 2010. And we launched in 2012.
Gary DeHart
Okay, and are you a CPA?
Paul Hamann
I am not my world revolves almost entirely around compensation.
Gary DeHart
Okay, so it was you said that kind of HR and compensation side, okay. So because I'm thinking you're our primary audience, right? Isn't that is that CPA, bookkeeping, accounting side, but you came at it from from the hay from the corporate side, I guess, right?
Paul Hamann
Yeah. So the folks that asked me to do these engagements were all CPAs they didn't know how to answer the question. They were out scrambling looking for somebody to do the studies for them. And so that's how I found the very specialized field of reasonable compensation before that it was pretty generalized.
Gary DeHart
Okay, and so so for our audience would certainly know more about reasonable compensation than I do I share with you prior my first exposure to it really was with within the past couple of months, and there's where we're a small company we're set up as a as an escort. And it's my so when you might be paying yourself too much. Doesn't doesn't be I like it. That's a whole other story. But as a small business never feels like a pain myself too much. But so. So, myth versus facts. Talk to me a little bit about reasonable compensation. You said IRS, oh five is when this really became kind of came to light. So now we're whatever that is 17 years. Beyond that. What have we learned? What's what's true? And what do people think that that aren't true?
Paul Hamann
Yeah, really interesting question, because reasonable comp has been around for a long time. But in 2005, the IRS launched a compliance study. And that didn't really mean much right, in 2005, but right about 2010, through about 2020. So for the last decade, there's just been a parade of court cases, IRS guidelines, fact sheets, job aids, that have really brought, what is reasonable compensation? How do you determine it? How does it affect your clients business, all events really come out over the last 10 years. Unfortunately, prior to all this information starting to come out, it was kind of a void, sort of fill that void a lot of rules of thumb or safe harbors or other ways of kind of answering that question without having good background information came about and they became so prevalent and repeated so many times that you would you would probably be shocked when we ask this question in our webinars, fact versus myth. How many folks because they've heard it so many times believe a myth to actually be a fact?
Gary DeHart
What are some of the major ones that you kind of run across?
Paul Hamann
Sure, there's three major ones. The first one might follow kind of along your thinking where people might be overpaying their reasonable compensation. And that's called the safe harbor rule. And it's literally referred to that in other people's blogs, and through the years as a rule. And what it is, is if you pay the Social Security maximum, the IRS will leave you alone. Well, whether the IRS leaves you alone or not, that's a whole nother discussion, right? What we want is an accurate reasonable compensation figure. So if you're paying the Social Security maximum, which is what 137 right now, something in that neighborhood, you may be significantly overpaying and paying significant more payroll taxes than you otherwise would. So 137,000, if your reasonable compensation was actually 85, that's a pretty big difference that you're paying payroll taxes on that you otherwise wouldn't. Probably the most prevalent one is called the 5050 rule. This is where you split distributions and salary up 50/50. It's not based on anything other than somebody started using it and repeating it over the years. And it became accepted as an actual rule. It's not it's again, a myth. And then the last one really kind of came out of trying to trying to benchmark a reasonable compensation figure where they will set reasonable compensation figure as a percentage of sales or as revenue. Again, not not, if you think about it as a way you'd want to pay yourself or your employees, I don't know, a lot of business owners that would want to pay their employees as a percentage of gross sales, or as net income. So those are the three top myths.
Gary DeHart
And is it? Yeah, cuz actually, it's funny. So 10 years ago, when we went in roughly 10 years ago, and we started our business, that was a conversation I had with our accountant at the time. And it was like, Well, you don't want your distribution to be too big to raise a fly. And well, and again, in startups, nobody's really worried about distributions being too big. Right. But that I mean, as you described it, that's really how we landed on kind of how we were we're paying ourselves and more than likely, it sounds like more than likely probably overpaying. Taxes. So and is it? So so who is this? Who do you find like your customer base? Who is it most? most appropriate for? Is it the small startup is the fortune 500 companies I mean, who really gets gets deep into this conversation?
Paul Hamann
There's a couple of groups that typically have this conversation, and they work with small and medium sized businesses. And it doesn't have to revolve around being an S Corp. reasonable compensation is a kind of a business life cycle conversation. Should you be an S corp might be the first time you had should have that conversation with your CPA, your or your EA. Because what that figure is could very well help determine whether that makes sense for you to convert from an LLC or a Schedule C. But once you are an S corp, or a C Corp because it lands in that world as well, knowing what that number is, keeps you from over overpaying or under paying and affects your Social Security. and it can also affect your audit or compliance risk not only for the small business owner who is ultimately using that figure, but also for the preparer who may be subjected to prepare penalties, they are the ones signing off on that return.
Gary DeHart
Okay, so since you mentioned prepare, I'm gonna jump over to another question we had talked about, or some topic we have discussed prior to really going live here. And that is, you know, who, you know, okay. Well, this makes sense to me that you're going to have a tax preparer or EA a person who's deep into taxes working in using this type of tool, or paying attention to that, what about, but you also said, No, it's really a lot broader than that, right? It's bookkeepers, accountants really should be paying attention to this. Can you touch on that just a little bit?
Paul Hamann
Absolutely. So again, in the initial phases, right, you're talking about entity planning, but let's say you've been an S Corp for a little while you've just become one. That's where the bookkeepers really enter the picture, because they are much more in tune with what's happening in the company's payroll. So if they see a figure that seems a little out of context, so let's say $24,000, which would be on the low side, or just happens to be 50/50, split between distributions in wages or the sole security maximum? What a perfect opportunity to bring that up with the client and say, have you looked at what your actual reasonable compensation figure would be? And so from that standpoint, the bookkeepers are really that tip of the spear, when it comes to companies that are already in there, and maybe aren't compliant,
Gary DeHart
And really could raise that flag and say, Hey, for two reasons, right? I mean, one and let's, let's be real accounting firms are in business to make money. So it's certainly fair game for the bookkeeper to say, hey, you know, what, here's possibly revenue opportunity for us as a as a firm, but also a money saving opportunity or, or prevention opportunity for the client. And I know accounting firms and bookkeepers, we don't really like talking about, oh, I'm in this to make money. But we're all in business when we have to make money right otherwise, otherwise, why are we doing what we do? So is the when somebody is working with you, guys. Is that? Am I? Am I just one off, say, Oh, I've got a client, I want to do a little research on how does that play out. And I know you had mentioned before that y'all are kind of tweaking some things right now. But so generally speaking, if a client or an accounting firm is interested in diving deep into this, again, it seems to me like it's a great opportunity for them to become that advisor, which the profession has been talking about for 10 years, or more, be that trusted adviser. And this is a great way to be a trusted advisor, right? A tool like this.
Paul Hamann
Yeah, so we did build the software for the professional advisor, whether that be a bookkeeper or CPA and EA, anyone who's working with him with those SMBs. And our product is set up as a web app. So again, it's just a simple login through your web browser. But it is subscription based. So once you have that subscription in place, you can come in and you can work with the clients you need to work with. There's a number of tools in addition to running reports. So a lot of times folks will think about this as mainly a compliance issue. So oh, I only need one or two reports, because I only have one or two S Corps. But you may use it another dozen times through planning season to help other clients decipher whether they should be an escort or not giving them the information that they shouldn't be can be really valuable, just as much as showing them that they should be. So it's a great planning tool as well.
Gary DeHart
Okay, and it's set up. I think you've told me before, it's an annual subscription. And again, we're not going to this isn't about selling the product it's about but as I shared with you before, to you know, when we're talking to a vendor in the space, it's hard not to talk about product and hard not to get real specific in the product. So but that's something that somebody is interested they can reach out to you guys. What's your what's the website?
Paul Hamann
www.RCReports.com
Gary DeHart
That's pretty straightforward. Okay. And I know that you and I are mostly going to be you are on our Future Forward Summit, which is taking place November 30. And December the first I can't remember I think you're on the 30th I don't know if you remember that off the top of your head or not, but you're on one of the days we'll be promoting that coming up pretty soon on on the site. But let me just double check my anything else that we have talked to out prior to this prior to going live here that that you think we need the cover.
Paul Hamann
The only other thing that I would mention, because we are doing Future Forward RC reports is an education forward company. And so at RC reports.com, one of the top links you'll see is education and events. So we have a regular schedule of education on the topic of reasonable compensation. We separate fact from myths, we do specialized education on 199, a and reasonable comp on entity planning and reasonable comp. And all of our live events are on there as well. We don't have very many on there. Currently, we're kind of coming out of that season. But if you're ever looking for what's coming up virtually or what's coming up in 3d, it's a great place to look.
Gary DeHart
Okay. And that's actually, I'm glad you mentioned that, because that was one thing I wanted to find out is is the resources that are available. So if I'm not a client, I can still go there. And I can still learn about reasonable compensation like because these things are on the near the front side of your login.
Paul Hamann
Yeah, and we have a very thorough blog that will answer almost any question you can come up with.
Gary DeHart
Okay. And we probably shouldn't talk to you not during this, but about providing some content on a fairly regular basis. Again, I think this is an important topic, both for Insightful Accountant and for Tax Practice News subscribers. So we're here here we are. It's October, almost November, is now the time when people tax preparers or the bookkeepers should be diving in to make changes. Is there a time of year that matters?
Paul Hamann
Absolutely. Right after the October deadline between then and the end of the year? That is probably not probably that is absolutely the busiest time for us. That is planning season. That's when bookkeepers and accountants are getting together with a small business owner and getting reasonable compensation nailed down so they can have everything in place and reconciled by year end. We do see quite a bit of usage in the first quarter leading up to that March 15 deadline as well. Not quite as much. But there are some folks that still addressed that in that timeframe as well. And then we do see significant use throughout the year and planning. But this is definitely the busy season when you're talking about reasonable compensation with your client.
Gary DeHart
Okay, well, very good. And again, if somebody did want more information, they could reach out the website was www.RCReports.com. And then do you have an email address? Or is there any any other way to reach out directly?
Paul Hamann
So yeah, we put all that on our site. So we have a phone number on there, you can give us a call, you can talk to sales support. You can email in any questions you have do a search for information you're looking for. We're happy to to get together with people answer their questions.
Gary DeHart
Okay, well, super well, let's you and I definitely want to connect after this to talk a little bit more about content and, and getting some regular content out there. Again, like I've not seen it written about, I don't think anywhere and in the for accounting focused media that I follow. So we'd love maybe we should be the channel for that. So Well, thank you so much. Certainly appreciate your time, Paul, in parting, any any last last things you can think of that we may not have covered? Before we sign off?
Paul Hamann
No, I think we pretty much covered pretty broad spectrum of different things for people just to start considering and thinking about when it comes to reasonable compensation.
Gary DeHart
Great. I'd love to have you back on especially maybe once we get through the crazy season, and just talk about this topic a little bit further, especially if we can get some content rolling on a regular basis. That'd be super. Yeah, hopefully we can do this again. And certainly you and I will be doing this and in about a month or so on future forward. So again, thank you. Thanks for joining us, Paul. And we'll talk to you very soon.