Business owners: Does your compensation meet the IRS standard of “reasonableness”?

Determining “reasonable compensation” is a critical issue for owners of C corporations and S corporations. If the IRS believes an owner’s compensation is unreasonably high or low, it may disallow certain deductions or reclassify payments, potentially leading to penalties, back taxes and interest. But by proactively following certain steps, owners can help ensure their compensation is seen as reasonable and deductible.

Different considerations for C and S corporations

C corporation owners often take large salaries because they’re tax-deductible business expenses, which reduce the corporation’s taxable income. So, by paying themselves higher salaries, C corporation owners can lower corporate taxes. But if a salary is excessive compared to the work performed, the IRS may reclassify some of it as nondeductible dividends, resulting in higher taxes.

On the other hand, S corporation owners often take small salaries and larger distributions. That’s because S corporation profits flow through to the owners’ personal tax returns, and distributions aren’t subject to payroll taxes. So, by minimizing salary and maximizing distributions, S corporation owners aim to reduce payroll taxes. But if the IRS determines a salary is unreasonably low, it may reclassify some distributions as wages and impose back payroll taxes and penalties.

The IRS closely watches both strategies because they can be used to avoid taxes. That’s why it’s critical for C corporation and S corporation owners to set compensation that reflects fair market value for their work.

What the IRS looks for

The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like enterprises under like circumstances.” Essentially, the IRS wants to see that what you pay yourself is in line with what you’d pay someone else doing the same job.

Factors the IRS examines include:

• Duties and responsibilities,
• Training and experience,
• Time and effort devoted to the business,
• Comparable salaries for similar positions in the same industry and region, and
• Gross and net income of the business.

Owners should regularly review these factors to ensure they can defend their pay levels if challenged.

How to establish reasonable compensation

Several steps should be taken to establish reasonable compensation:

1. Conduct market research. Start by gathering data on what other companies pay for similar roles. Salary surveys, industry reports and reputable online compensation databases (such as the U.S. Bureau of Labor Statistics) can provide valuable benchmarks.

Document your findings and keep them on file. This shows that your compensation decisions were informed by objective data, not personal preference.

2. Keep detailed job descriptions. A well-written job description detailing your duties and responsibilities helps justify your salary. Outline the roles you perform, such as CEO-level strategic leadership, day-to-day operations management and specialized technical work. The more hats you wear, the stronger the case for higher compensation.

3. Maintain formal records. Hold regular board meetings and formally approve compensation decisions in the minutes. This adds an important layer of corporate governance and shows the IRS that compensation was reviewed and approved through an appropriate process.

4. Document annual reviews. Perform an annual compensation review. Adjust your salary to reflect changes in the business’s profitability, your workload or industry trends. Keep records of these reviews and the rationale behind any changes.

Strengthen your position

Determining reasonable compensation isn’t a one-time task — it’s an ongoing process. We can help you benchmark your pay, draft necessary documentation and stay compliant with tax law. This not only strengthens your position against IRS scrutiny but also supports your broader business strategy.

If you’d like guidance on setting or reviewing your compensation, contact us.

© 2025

Creating a marketing strategy for any company isn’t a “one and done” activity. As you’ve no doubt experienced, the approach you use to connect with your audience needs to adapt to factors such as the economy, marketplace changes, and customer and prospect preferences. Let’s take a step back and review some of the big-picture tasks associated with sharpening your marketing strategy.

Refine target selection

Consider each prospect, existing customer and target group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.

More desirable customers will buy in sizable volumes with enough frequency to provide a steady income stream over time rather than serve as one-time or infrequent buyers. They’ll also be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill a prospect’s demand. If not, you’ll need to expand your operations to take on that customer, which will cost you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Adjust price points

Your price points are another key factor. It’s a tricky balance: Setting prices low may help attract customers, but it can also minimize or even eliminate your profit margin.

In addition, think about what payment terms you’re prepared to offer. Sluggish accounts receivable can strain cash flow. Establishing a timely payment schedule with customers is critical to sustaining operations and supporting the bottom line.

If you must spend a substantial amount of cash to set up a new customer, such as buying new equipment, consider offering initial pricing that includes a surcharge for a specified period. After you’ve recovered the cost of the equipment plus carrying charges, you might offer the customer a volume- or loyalty-based discount.

Craft your messaging

When you know who you want to sell to and what you’re going to charge, it’s time to craft your messaging. This is obviously the key step — literally marketing your products or services. So, clarity and consistency are key.

Begin by identifying your core value proposition. This is what sets your business apart from competitors. Communicate it in simple, direct language. Generally, you want to avoid jargon unless you’re working in a very specific context where industry terminology or technical knowledge is critical to sales. Be persuasive by providing remedies for your audience’s pain points.

You may need to tailor messaging to different market segments. For example, established customers usually respond best to a marketing message that reminds them of your company’s reliability and the total value of your mutually beneficial relationship. Meanwhile, prospects and newer customers probably need more persuasion and “proof of value.” Carefully choose the right marketing channels as well. These may include print, email, social media and in-person outreach.

Finally, watch out for inconsistency. Even if you vary your exact wording when addressing different market segments, your overall messaging needs to be uniform in look, tone and details. Disjointed communication — especially when it comes to things like pricing and product or service specifications — can sink a marketing strategy fast.

Today and tomorrow

An ineffective approach to marketing can quietly sap a company’s financial strength as sales leads diminish in number or value and competitors gain more attention in the marketplace. Conversely, a strong and timely marketing strategy can be a real revenue driver. We can analyze your marketing costs, as well as your price points, and help you develop a viable strategy for today and tomorrow.

© 2025

Most small to midsize businesses today operate in tough, competitive environments. That means it’s imperative to identify and reach the right customers and prospects.

However, unlike large companies, your business probably doesn’t have a massive marketing department with seemingly limitless resources. You’ve got to pursue savvy campaigns while also controlling costs. Here are three fundamental ways to get more bang for your marketing bucks.

1. Set a budget, rinse, repeat

Many companies, particularly start-ups and small businesses, engage in “marketing by desperation.” That is, they throw money at the problem haphazardly and hope for good results. A better strategy is to take a step back and set a realistic marketing budget based on factors such as:

• Projected annual revenue (one rule of thumb is to allocate 5% to 10% of annual gross revenue to marketing, but this may not always be applicable),
• Industry benchmarks (such as what similar-sized businesses in your industry spend on marketing), and
• Growth goals (more aggressive growth may call for more dollars allocated).

Unfortunately, you can’t take a “set-it-and-forget-it” approach to your marketing budget. Every quarter, or at least at year end, compare your “marketing spend” to return on investment (ROI) using clear, verifiable financial metrics. Look for both 1) wasteful spending that you can eliminate or reallocate to other parts of the business, and 2) successful spending strategies that you can use for future campaigns. Regular budgetary reviews and adjustments will help your company adapt to industry and market changes without over- or underfunding marketing efforts.

2. Use metrics and technology to assess campaigns

One of the great things about marketing today is that many different metrics can help fine-tune your efforts. Examples include number of leads generated, lead conversion rate and customer acquisition cost. An analytics-driven approach allows you to precisely measure the performance of your marketing campaigns.

Calculating these and other metrics shouldn’t involve pen and paper! You can use various technology tools to gather data, generate reports and track progress. For example, if you use Google Business, it offers Google Analytics. This tool helps businesses track and analyze website traffic and visitor behavior. Other platforms, including most social media apps, offer similar functionality.

To take things to the next level, assuming you haven’t already, consider investing in customer relationship management software. Carefully selected and implemented, one of these solutions can allow you to input, gather, track and analyze massive amounts of data to support marketing campaigns.

3. Avoid common mistakes

As you look to increase marketing ROI, watch out for common mistakes. First, don’t ignore the importance of meticulously defining your target audience. Although casting a wide net may seem like a good idea, doing so often leads to inconsistent results and wasted spending.

Second, don’t go overboard on paid ads. There are many forms of these online — including ads associated with search engines, websites, social media platforms and video channels. On the plus side, they may yield quick results. However, they can also drain your marketing budget if you don’t manage them diligently. A best practice is to start with a small number of paid ads (even just one), test different ways to use them and scale up based on positive results.

Last, never lose sight of the power of referrals. Word of mouth remains perhaps the most cost-effective way to market your business. Encourage satisfied customers to leave positive reviews on your website and social media channels. Consider offering discounts or freebies for referrals or online shout-outs.

Maximize positive impact

At the end of the day, getting a solid ROI from marketing is much more than simply cutting costs. You have to maximize the positive impact of your spending. Contact us for help creating and maintaining marketing budgets that align with your strategic goals and integrate well with your company’s other operational areas.

For business-to-business (B2B) companies, effective marketing begins with credible and attention-grabbing messaging. But you’ve also got to choose the right channels. Believe it or not, some “old school” approaches remain viable. And of course, your B2B digital marketing game must be strong.

Press releases

It doesn’t get much more old school than this. Launching a new product? Introducing a new service? Opening a new location? When your company has big news, getting the word out with a press release can still pay off.

Be sure to follow best practices when writing them. Include the topic’s who, what, where, when and why. Add a quote of at least two sentences from you (the business owner) or another leadership team member. If appropriate and feasible, also incorporate customer or industry expert testimonials.

In addition, maintain an updated contact list of press release recipients. Customarily, these include media outlets, business news aggregators, key customers, prospects, investors and other stakeholders.

Authoritative articles

Do you know of one or more industry publications that would be a good fit for sharing your knowledge and experience? If so, and you’re comfortable with the written word, submit an idea for an article.

Getting published in the right places can position you (or a suitable staff member) as a technical expert in your field. For example, write an article explaining why the types of products or services that your company provides are more important than ever in your industry. Or write one on the technologies that are most affecting your industry and what you expect the future to look like.

But be careful: Publications generally won’t accept content that comes off as advertising. Write articles as objectively as possible with only subtle mentions of your company’s offerings.

There are other options, too. You could pen an opinion piece on how a legislative proposal will likely affect your industry. Or you might write a tips-oriented article that lends itself to an online publication looking for short, easy-to-read content. For any type of article, insist on attribution for you and your business.

Digital marketing

Over the last couple of decades, digital marketing has taken the business world by storm. This holds true for B2B companies as well. Virtual channels are many, with possibilities including your website, blogs, various social media platforms and podcasts.

In fact, there are so many digital avenues you could travel down, you may find the concept overwhelming. There’s also a high risk of burnout. Many businesses add blogs to their websites or open social media accounts, post a few things, and then disappear into the ether. That’s not a good look for companies trying to establish themselves as industry experts.

To be successful at digital marketing, or even just to keep your website up to date, create an editorial calendar and stick to it. Devise a strategy to push out quality content regularly on your optimal channels. It can be authored by you, one or more qualified staff members, or a content marketing provider.

Critical role

Companies that provide B2B products or services must establish credibility and demonstrate expertise in whatever industry they operate. Marketing plays a critical role in this effort, so choose your channels carefully. We can help you identify, quantify and analyze all your marketing costs.

© 2024

A strong brand can help boost revenue, while a weaker one may reduce sales opportunities and stifle growth.

Like many business owners, you’ve probably spent considerable time and energy crafting your company’s brand. Doing so has likely involved coming up with a memorable business name and logo, communicating with customers in a distinctive manner, and, above all, building a strong reputation in your market.

So, how’s all that going? Although your bottom line can certainly tell you a thing or two about the current success of your business, brand strength can be a little trickier to put a finger on. That’s why many companies conduct brand audits — essentially, formal reviews of a brand’s efficacy and market standing.

Data to gather

There are many ways to conduct a brand audit. The optimal steps for your business will depend on factors such as your industry, your company size and the popularity of your brand.

But most audits have certain things in common. For starters, they generally rely on information you already have on hand or could easily generate. Examples include:

Sales data. One objective of a brand audit is to identify sales-related key performance indicators and trends that may relate to branding. Essentially, if sales have slumped, is your brand partly to blame? And if so, why?

Website analytics. Brand audits usually investigate whether site traffic is trending upward or downward. They also typically determine how much time visitors spend on your site and on which pages. A strong brand will draw consistent visitors who tend to stick around. A weaker one is often indicated by a large number of accidental visitors who leave quickly.

Social media interactions. Although social media has its challenges and downsides, one enormous benefit is that each of your accounts should provide a wealth of interaction data. Brand audits can analyze this information over time to assess brand strength — and determine whether it’s rising or falling.

Customers and employees

Most brand audits also involve gathering the thoughts and opinions of two major constituencies: customers and employees.

Customers, of course, represent the richest source of insight into brand strength. Brand audits can involve surveys that posit various questions to customers and prospects about your brand. But such a survey needs to be carefully designed. You’ve got to keep it short, clear and easy to complete. Most are now conducted online.

Employees can also tell you things about your brand that you might not know or haven’t thought about. Your sales staff, for instance, could be getting feedback — positive or negative — from customers and prospects. So, an employee survey focused on brand-related issues can be a useful part of an audit.

More than marketing

Generally, brand audits are conducted for marketing purposes. They can help your marketing department determine how to enhance your brand — or potentially even whether you need to undertake a full-blown rebrand. But regular brand audits can also benefit strategic planning. You may even discover that someone has been using your brand fraudulently!

Precisely who should conduct a brand audit typically depends on business size. Larger companies with sizable internal marketing teams may be able to do it themselves. But many small to midsize businesses turn to marketing consultants or agencies to do the job. Our firm can help you assess the costs of a brand audit, as well as gather and analyze some of the financial data involved.

© 2024

Businesses have long been advised to engage in active dialogues with their customers and prospects. The problem was, historically, these interactions tended to take a long time. Maybe you sent out a customer survey and waited weeks or months to gather the data. Or perhaps you launched a product or service and then waited anxiously for the online reviews to start popping up.

There’s now a much faster way of dialoguing with customers and prospects called “conversational marketing.” Although the approach isn’t something to undertake lightly, it could help you raise awareness of your brand and drive sales.

Concept and goal

The basic concept behind conversational marketing is to strike up real-time discussions with customers and prospects as soon as they contact you. You’re not looking to give them canned sales pitches. Instead, you want to establish authentic social connections — whether with individuals or with representatives of other organizations in a business-to-business context.

The overriding goal of conversational marketing is to accelerate and enhance engagement. Your aim is to interact with customers and prospects in a deeper, more meaningful way than, say, simply giving them a price list or rattling off the specifications of products or services.

In accomplishing this goal, you’ll increase the likelihood of gaining loyal customers who will generate steady or, better yet, increasing revenue for your business.

Commonly used channels

The nuts and bolts of conversational marketing lies in technology. If you decide to implement it, you’ll need to choose tech-based channels where your customers and prospects most actively contact you. Generally, these tend to be:

Your website. The two basic options you might deploy here are chatbots and live chat. Chatbots are computer programs, driven by artificial intelligence (AI), that can simulate conversations with visitors. They can either appear immediately or pop up after someone has spent a certain amount of time on a webpage. Today’s chatbots can answer simple questions, gather information about customers and prospects, and even qualify leads.

With live chat, you set up an instant messaging system staffed by actual humans. These reps need to be thoroughly trained on the principles and best practices of conversational marketing. Their initial goal isn’t necessarily to sell. They should first focus on getting to know visitors, learning about their interests and needs, and recommending suitable products or services.

Social media. More and more businesses are actively engaging followers in comments and direct messages on popular platforms such as Facebook, Instagram and Tik Tok. This can be a tricky approach because you want responses to be as natural and appropriately casual as possible. You don’t want to sound like a robot or give anyone the “hard sell.” Authenticity is key. You’ll need to carefully choose the platforms on which to be active and train employees to monitor those accounts, respond quickly and behave properly.

Text and email. If you allow customers and prospects to opt-in to texts and emails from your company, current AI technology can auto-respond to these messages to answer simple questions and get the conversation rolling. From there, staff can follow up with more personalized interactions.

A wider audience

Like many businesses, yours may have already been engaging in conversational marketing for years simply by establishing and building customer relationships. It’s just that today’s technology enables you to formalize this approach and reach a much wider audience. For help determining whether conversational marketing would be cost-effective for your company, contact us.

© 2024

Controlling costs is fundamental for every business. But where and how to address this challenge can change over time based on various economic and logistical factors.

Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO’s Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were:

1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy.

Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.

It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending.

A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce.

Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.

3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.

Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value.

Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider our firm for assistance.