September 9th 2024.
To kick off this discussion about using ChatGPT for determining S corporation reasonable compensation, I want to make a disclosure. In my opinion, large language models like ChatGPT are not particularly proficient in tax accounting or tax law. At least not yet, and perhaps not ever.
However, if you are a shareholder of an S corporation and struggling to determine an appropriate salary for yourself as an employee, ChatGPT may be a useful tool. Not only is it free, but it can also provide a reasonable estimation that can be used as a starting point in your decision-making process.
Let me walk you through the process I would recommend. The key is to provide a detailed and specific prompt for the AI to work with. For example, a carpenter who also serves as a project manager for a small construction company in Mount Vernon, Washington might ask ChatGPT the following question:
"I work as a carpenter and project manager for a small construction company in Mount Vernon, Washington. I have several years of experience. The firm’s total revenues fall between $500,000 and $1,000,000 a year usually. We do small home remodeling jobs. What would be the range of reasonable salaries for this position as well as common fringe benefits? Please cite your sources."
By providing such specific information and requesting citations for sources, you increase the reliability and accuracy of ChatGPT's response. In my own experience, when I asked ChatGPT this question in August of 2024, it provided a satisfactory answer:
"In your role as a carpenter and project manager for a small construction company in Mount Vernon, Washington, several factors influence salary expectations, including the size of the company, your level of experience, and regional economic conditions.
For a position combining carpentry and project management at a small firm, here’s a reasonable salary range:
Salary Range: $60,000 to $90,000 annually.
Breakdown:
Carpenter with Project Management Duties: Given your extensive experience and dual role, your compensation would be on the higher end of the scale for similar positions in the area. In Washington state, the salary range for a carpenter typically falls between $50,000 and $75,000. Adding project management responsibilities increases this range.
Regional Factors: Salaries in Washington can be higher compared to other states due to the higher cost of living and strong demand for skilled trades. Mount Vernon, being a smaller city, might have slightly lower wages compared to larger urban centers like Seattle, but the difference isn't substantial.
Sources:
Bureau of Labor Statistics: Data on carpenters and construction managers provides baseline figures, with carpenters earning an average of around $60,000 annually, and project managers potentially earning significantly more, especially with specialized skills.
Indeed & Glassdoor: These job sites provide salary insights specific to roles in the construction industry, with regional variations factored in.
Common Fringe Benefits
Health Insurance: Many companies offer health insurance as a standard benefit. This can vary in terms of coverage and the percentage of costs covered by the employer.
Retirement Plans: 401 plans are common, sometimes with employer matching contributions.
Paid Time Off: This includes vacation days, sick leave, and personal days. For your level of experience and role, around 10-15 days of PTO annually is typical.
Tool Allowance or Reimbursement: Given your role involves carpentry, some firms provide allowances or reimbursement for tools and equipment.
Professional Development: Some companies support continuing education or training relevant to your job.
Overtime Pay: If you work beyond standard hours, overtime pay is usually applicable, though this can depend on the company's policy and your specific employment status.
Sources:
Society for Human Resource Management: Provides benchmarks for typical fringe benefits offered by employers.
Industry Surveys and Reports: Various reports and surveys on construction industry compensation and benefits offer additional insights."
Please note that these figures and benefits are approximate and may vary based on specific company policies and regional economic conditions.
In my opinion, a small construction company owner who works in Mount Vernon, Washington and serves as both a manager and a carpenter could reasonably pay themselves a salary of $60,000 to $90,000 in 2024.
If you are interested in using ChatGPT to determine S corporation reasonable compensation, here are two additional tips to keep in mind. First, it is important to review and adjust the salary every year to ensure compliance with IRS regulations. As an S corporation, setting a reasonable salary for shareholder-employees is crucial.
Second, I recommend saving the prompt and the AI's response as a document and keeping it with your payroll records. This can serve as a reference in case of any questions or inquiries from the IRS or state agencies.
For more information on S corporation reasonable compensation, here are some helpful resources. Our S corporation tax savings calculator can help you determine if switching to an S corporation is financially beneficial for your business. We also have a comprehensive list of S corporation blog posts.
Additionally, you may find our blog post on setting a safe reasonable salary for S corporation shareholder-employees helpful. And for a summary of the IRS regulations on wages for S corporation officers, check out their fact sheet.
I hope this guide has been useful in understanding how ChatGPT can be utilized in determining S corporation reasonable compensation. Please keep in mind that our company does not currently serve construction companies in Mount Vernon, Washington, and the location was chosen for its proximity to where I grew up.
Thank you for considering ChatGPT as a tool for your business needs. Best of luck in your future endeavors!
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