1. What are the toughest interview questions, and how can you answer them effectively?

There aren’t any specific tough interview questions (although that’s what you see most often in advice columns) - as the questions change based on the company, the position and the interviewer - you never know what is going to be asked, that’s the tough part.  The typical ones are not tough because you know them and have prepared an answer.

In general, the toughest questions are behaviorally based – “tell me about a specific time when…” where the interviewer is looking for specific examples of times when you successfully exhibited a skill or behavior that they are looking for.

How to prepare?  Look for behaviors and skills listed in the job description, and especially company values listed on their website, and prepare specific examples of when you have demonstrated these.  Interviewers do not like it when you cannot answer their questions with specific examples, so make sure you prepare ahead of time.

2. What are the three biggest mistakes you see on resumes or cover letters?

Most advice columns list such things as spelling, keeping it to two pages, customizing your cover letter, do not include a career objective (most recruiters don’t care), but put a summary at the top.  None of this matter unless you can get your resume through the applicant tracking system, and then the recruiter. 

Most resumes go into an automated tracking system that matches resumes with key words in the job description.  To get your resume through, you have to identify what those key words are and then make sure they are in your resume in some form – you can even list these key words as competencies at the end of your resume – to make sure they get picked up and your resume gets through!  Nothing else will happen unless this first step occurs – the resume will go into resume database limbo with hundreds of others.  

3. What are the worst mistakes a candidate can make when interviewing?

Recruiter and hiring managers are looking for reasons to hire you. If you’ve gotten to the interview stage, you probably meet their minimum requirements – so don’t give them a reason not to hire you.  What do I mean?  Answer the questions they ask you and do not volunteer opinions, ideas or information that they are not asking.  Most employees talk themselves out of a position by offering too much information about themselves.  It is yours to lose at this point - don’t talk yourself out of it.

4. What can a qualified candidate do to stand out and land the job?

Know your unique value proposition and how it relates to what they are looking for.  There are hundreds of professionals out there with the same experience as you, who are loyal, committed, hardworking, strategic, blah blah blah…. you get the idea.  To stand out (which you have to do) you need to understand your uniqueness and how it translates to what they are looking for and then be able to articulate it.  Being “vanilla” and all things to all employers to get the job – won’t get you the job.  Be yourself, know who that is – if you don’t – get help!   A career coach can help you in this area and could mean the difference between getting a great job - or not.

5. What advice do you have for job seekers in an employer’s market?

Know who you are, if you don’t – how can they?  At the end of the day if it comes down to two qualified candidates, one who has all of the requirements and one who makes a connection, is authentic and genuine, and knows who they are and what they want – well who would you hire?  

In tough times, people feel more vulnerable and their senses of safety and confidence can easily evaporate. Never has it felt more important to watch out for your people. A boss who backs up her people provides an emotional relief as well as a material one. But don’t assume that your team members know that you’d go above and beyond to support them. Even the best bosses can be poor judges of what it’s like to work for them. Make it clear by telling your employees that you have their backs. And, since actions always speak louder than words, take every opportunity to demonstrate your unwavering support and avoid creating situations that make it seem like it’s everyone for him or herself. Today’s Management Tip was adapted from “Do You Have Their Backs? Or Just Your Own?” by Robert I. Sutton.

50 years ago we had secretarial pools, carbon paper and mimeograph machines for making copies.  Everything was sent “snail mail” and the Fax machine hadn’t been invented. 

Yes, that’s right, the annual performance review as we know it today was developed over 50 years ago at a time when management was very much “command and control” and the manager had direct oversight and first-hand knowledge of an employee’s work.   It has not changed much over that time except to make it more complicated and then automate it due to its complexity, while business has changed dramatically. 

The shifting business landscape

In the last 15-20 years we saw a shift to more team-based work and problem solving with work being accomplished as a “team” rather than the direction of a manager. We saw the role of the manager shift to being responsible for building a cohesive and productive team, and we saw the rise of “team building” and 360 feedback as the manager had less direct/first-hand knowledge of their employees’ work, so reviews started to rely more on feedback from the team and manager.

Within the last 5-10 years we’ve seen another shift to cross functional and very fluid work teams, where there is no concept of a single team.  People work on different projects or sprints, working with different people on different teams over the course of the year.  At this point the manager may have very little first-hand knowledge of an employees work, nor does any one single “team”.

The other change is that 50 years ago, markets and business changed slowly over the course of a year, so annual goals and an annual review made more sense then.  Now most companies have semi-annual goals, and in many cases quarterly goals because of the speed of change.

The annual review today (or semi-annual review, which I’ll use interchangeably) provides too little relevant information, too late to make any real difference over the course of the year.  You’ve lost the ability to assess, iterate and make course corrections over those 12 months.  It’s too late to make the very changes needed to achieve results.    For those in the tech world it’s using a waterfall process, in an agile environment.  

Through all of this change, we are still using the same annual review that was developed over 50 years ago.  We’re using old thinking to try to solve a new problem.  We’re using old processes in environments where they no longer work. 

Why? We are a lot like frogs.  If a frog falls into hot water, it will immediately jump out, but if it lands in cool water that slowly heats up, it will die before it knows what is happening.  Same is true for change.  Our work environment needs have slowly changed, but our performance processes haven’t and they are dying slowly, without being aware of what’s happening.  Although, based on feedback from managers and employees, we’ve had a sense that something is not right for a while now.

Yet another shift

There is currently another shift underway – to a more “democratized” form of performance management where the employee owns and drives their development, rather than waiting for HR or their manager to initiate.

We are seeing this happening now as more employees are operating as independent or “free agents” and in the rise of independent contractors.  Employment agreements are “at will”. The concept of loyalty is ending as baby boomers retire.  Employers are not loyal to their employees. They make decisions based on business needs as their stakeholders require.  If employees don’t evolve and produce along with the pace of change – they are replaced.

Conversely, employees are no longer loyal to a company for their career.  If they aren’t challenged and don’t grow and develop, just like “free agents” they will leave for another position that gives them that opportunity.  In many corporations the expectation seems to have become “sink or swim” – be great, or be replaced.  There is very little real coaching and development going on.  Employees who find themselves on their own will leave to gain new experience and advancement if not provided by their current employer – at least the good ones will.

As a result, the successful employee “agent” is taking a more active role in their growth and development and not waiting on the manager or company to make that happen.  The manager’s role shifts to that of a coach, responsible for recruiting great “talent” and then coaching them to optimal performance, just like a coach in sports. The Gen Y and Millennium generation was brought up on constant feedback and coaching from parents and coaches.  The biggest draw for recruiting and retaining them is meaningful feedback and coaching.

New technology is already supporting this shift.  There are some great online tools on the market today, such as Checkster, where with just an email address, employees can solicit feedback on their performance from peers, past colleagues and even clients. With just the click of a button, they get back an anonymous report with feedback on their performance.  The assessment and review process is now in the employee’s hands.  And employees are utilizing these tools and coming to job interviews prepared with not only references, but actual feedback on their performance.  

This is a big shift that is occurring, and also the biggest opportunity for companies over the next decade. Those that recognize and get out ahead of this will be more successful.  Those that hold on to antiquated processes will go the way of the Platypus.

What happens next?

Until performance reviews become an integrated business process (like project management, Agile development or general accounting procedures), they will remain an extraneous, after-the-fact process that provides little to no value.  Currently, it’s a form that we are required to fill out once (or twice) a year from HR that has no immediate impact on day-to-day success.  HR is not necessarily to blame.  In researching performance management myself, there has not been a lot of thought leadership in this area up until now. 

What needs to happen?  In essence the annual performance review needs to be replaced by adopting a simple, agile and iterative process supported by a coaching culture where performance management becomes an integrated day-to-day process directly leading to business results and employee development throughout the year, not something that is done at the end of the year, and after the fact.

There are two elements: one is adopting a simple integrated process supported by coaching, and the other is creating a coaching culture. 

Creating a coaching culture is based on the concept that everyone in the organization is being coached on a regular basis.  Most managers have weekly 1:1’s with their employees and this leverages that time, rather than creating additional meetings or work to be done.  It creates a common language and common expectations.  Because everyone, including the manager and hopefully the CEO, is being coached, it is transformational rather than remedial.  It begins with the mindset, “I am here, I want/need to be there – and a plan to do it.”

In its simplest form, it starts with the employee soliciting feedback on their performance on a regular basis throughout the year that makes sense for them.  It could be after each sprint, a project, or quarterly and the needs are usually different in different areas of the company.  What works for sales probably does not work for engineering.  My role as an organizational coach is to ask the right questions and create new thinking in this area that makes sense for the organization.

Based on the feedback, the employee with coaching from their manager identifies 3-4 goals that are important to their success.  They could be business or personal development goals, but usually both.   The employee makes commitments as to what they are going to do for the next week, and then in the following week’s meeting, they hold themselves accountable for their results and their commitments.  If not, talk about what blocked them from doing so.  This is all captured in a pre-meeting and post- meeting document that the employee, not the manager, completes.  Sounds simple?  It is.  Why hasn’t it worked?

The shifting role of the Manager

The manager’s role as coach is to help employees create meaningful goals, affirm successes and help them when they get stuck through effective coaching skills.  This requires not only coaching training for the manager, but having experienced a successful coaching relationship themselves.

This experience is the key to success and where most coaching training and managers fail.  I have designed and delivered coaching training to managers and have sent managers to external coaching training with limited results.  The reason?  “Until the manager has experienced a successful coaching relationship themselves they cannot possibly be an effective coach.”  You have to experience it first-hand to be able to recreate it. 

A good coach can help you set bolder goals and accomplish them in less time than anyone can do on their own. We see this all the time in coaching.  People come with goals that they think are going to take a lot of time to accomplish, but with professional level coaching, they execute more quickly than they first imagine.   But first, for a manager to be a good coach, they have to have a good coach themselves.

Getting Started

Each organization is different, but it usually starts with a small group – a grass roots approach rather than a top down edict.  The group is usually a manager and their department, or a Director and his/her managers.  A professional coach comes in and coaches both the manager and the direct reports.  This way both the manager and their direct reports experience a successful coaching relationship with a professional coach.

After the successful completion of a program or set of goals, the managers are then trained on how to be effective coaches themselves, and then take on the role going forward.  The idea is for the managers to become self-sufficient in their role.  Usually after about six months, the managers are ready for advanced training and the organizational coach is available as a resource. Some companies are adopting “peer coaches” rather than manager coaches.  This is an interesting concept that could work in some environments. 

What typically happens with this bottoms-up approach is that word gets around and other managers and departments want in.  Especially when managers find out this is an alternative to doing an annual review!  The goal is to create a coaching culture using a simple process.  Assessments are done throughout the year when it makes sense and form the basis of goals – documentation is created by the employee as part of the weekly 1:1, course corrections happen in a timely manner, results improve, employees grow and develop, and a separate annual review? It becomes extinct.

Next edition – Join me as I answer common questions, such as: What about ratings for compensation decisions? What about documentation?  Do I have to eliminate the annual review or can I do both?  What if an employee is not owning their development?  What if a manager does not want to be a coach?  And others…  Feel free to email me your questions.

Join Alicia Marie as she interviews Brian Walters – Attorney at Law on September 15th at 4pm CST.

Alicia Marie will ask the basic questions all business owners have such as: What do I do when I am starting a small business ? What are my options? DBAs, Corporations, Limited Liability Companies, and partnerships, and the differences between them? What should I know about selling my business in the future? Should I bring on a partner? Should I trade mark my logo? Should an attorney approve my employee contract? What protections should I have as an employer?

Mr. Walters is the founding member of Walters Dunn, PLLC. His practice focuses primarily on business and bankruptcy law. He has practiced extensively in the areas of mergers and acquisitions (M&A), corporate organization, corporate governance, securities offerings, conversions, domestication of foreign business entities, and corporate reorganizations. Mr. Walters is a published author in the area of professional business entities.

Mr. Walters also works with consumers and businesses in bankruptcy reorganizations and liquidations. This includes debt reorganizations, creditor/debtor negotiation, mechanics liens, real estate and personal property foreclosures, and debtor/creditor asset protection.

Date & Time: Wednesday, September 15th, 2010 at 4PM CST.

Call (512) 989-2230 or send an email to rsvp@peoplebizinc.co to register. 

To join session, dial (724) 444-7444, call ID: 64981, pin #1.  No cost to attend. Reserve your space today!

” Death of a dinosaur: The end of the annual performance review- and the birth of Organizational Coaching-

The business world is growing and changing at ever quickening speeds, yet there has been little change in performance management over the past 10 years to adapt to these changes.Like the platypus, the annual performance review has not kept up with the speed of change and finds itself stagnant, obsolete and ineffective in meeting today’s needs. For many companies it is a slow and painful death bringing too little relevant information, too late to make a difference.  Weeks of lost productivity, gathering feedback, filling out forms,  uncomfortable meetings, and mismatched expectations is hated and reviled by managers and employees alike. New and ever changing business challenges, need a new performance management approach that is relevant, agile and iterative -  leading to continuous growth and results. Until performance management is an integrated business process like project management, software development, and general accounting procedures, it will remain a slow moving dinosaur, ambling its way towards extinction – unfortunately taking many  businesses with it. Learn more about Integrative performance coaching (organizational coaching) in this interview. RSVP reserve@peoplebizinc.com 

You will call in at l: (724) 444-7444,  Call ID:  64981,  Pin: 1#   - The call is free.

The middle way is very simple. Keep it simple and you will find the balance you have been yearning for. All extremes are fear based and destructive. Should you eat all the time? Well no, that would not be good for you. Should you stop eating all together? No, that would not be good for you. I could ask you the same questions around exercise,  work, play, relationships and on and on.  From science, we know that if you pull a pendulum 30 degrees to the right it will swing 30 degrees to the left. You do not need a philosopher to understand this.  

Sometimes an extreme solution feels like a good idea. For example; if you are always alone, eat alone, go to movies alone, watch TV alone, and work alone. Being in a relationship where you are together all the time may sound good to you. The reason it seems like a good idea is that you are living in the opposite extreme. However, if you then entered into that relationship, it would not be long until you needed your space. Learning to swing your pendulum less to the left or to the right is the middle way. The middle way is that place where you are not forcing or pushing against anything.  

The energy is balanced. You must first realize that everything has its opposite. This means everything has a middle point as well. Awareness of this makes the middle way possible. When you stop swinging between the opposites, you will discover far more energy than you ever imagined. What takes others hours will start to take you minutes. The things that wear other people out will not even faze you. You will learn how to manage your energy efficiently. 

I am saying that most of us waste tremendous energy on extremes. The inefficiency of your actions are determined by how off center you are. When you spend lots of time trying to maintain an extreme, nothing moves forward. You get stuck in a rut. You become stuck working too hard or too little, eating too much, not sleeping, being depressed.  

How do you find the middle way? How do you stop the pendulum from swinging back and forth so violently? Amazingly enough, you do this by leaving the pendulum alone. It will not keep swinging to extremes unless you feed the extremes with energy. Stop participating in the extremes and your pendulum will come to center. You will be filled with energy because you have stopped wasting it on extremes.  

This is quite different from how most people live. Someone cuts you off in traffic and you could be upset for an hour or more! If you are operating it the middle way.  Things happen and they pass. You do not get pulled into upset easily. Someone cuts you off in traffic and you feel pulled towards upset…then being aware, you open your heart, release and move on. Continuous upset is a signal that you are operating in an extreme. We all get out of balance. It can be a great way to discover the middle way actually.  

Awareness of your emotions will keep you from being stuck. The middle way is blind. You cannot see where you are going instead you use your cane to feel where you shouldn’t go thus finding your path.  

Excerpt from Healthy Solutions Program http://www.peoplebizinc.com/lifeworks/healthy-solutions/ 

Pieter J. DeWet, M.D., M.D.(H), FAAFP, ABHIM
Holistic Medicine, Integrative Medicine, Homeopathy,  Family Practice, Chronic Disease Management

Dr. Pieter J. DeWet has been in private practice, practicing Wellness medicine since 1997 and is the owner and medical director of Quantum Healing Institute in Tyler, TX.  Dr. De Wet graduated medical school in 1985 and has been a family physician since 1991 when he obtained his Board Certification in Family Medicine through the American Board of Family Medicine.  He has been a fellow of the American Academy of Family Practice since 1994 and completed a fellowship in Faculty Development in 1994.  He has been a Diplomat of the American Board of Holistic and Integrative Medicine  since the year 2000.  In 2007 he also received his Arizona Homeopathic and Integrative medicine license. 

Dr. DeWet completed his residency in family medicine at the University of Texas Health Center at Tyler in 1991. He pursued a career in academic medicine at UT Health Center starting immediately after his residency until he left UT Health Center in 1997 to go into private practice. Dr. DeWet was associate professor of family medicine and associate program director of the family practice residency program. He was intimately involved in the development of numerous chronic disease management programs at the University of Texas Health Center. He was also the founder and director of the Center for Nutrition Preventive Medicine there from 1995-1997.

Dr. DeWet has been co-host of a nationally syndicated radio program called Healthy, Wealthy & Wise since 2004. He and his wife Cindi are currently hosts of their own XM radio program called “The Quantum Healing Hour” on XM 170 every Saturday 4-5PM CST. Dr. DeWet has spent his entire career in medicine starting from the time he entered medical school to search for the most effective, least harmful and the most cost effective methods to treat patients with complex health challenges, and currently treats patients from all around the country and worldwide for diseases and health conditions ranging from the most simple to some of the most complex. Dr. DeWet approaches all patients holistically, which means he focuses on body, mind and soul and routinely addresses and assists in the treatment of patient’s physical, emotional, social, mental, environmental and spiritual issues as it relates to their overall health situation. He is determined to find and treat the root causes of illness in each patient that he sees which is one reason why Dr. DeWet is credited for getting very good results with the majority of his patients, especially those that are willing to make the commitment to heal all aspects of their health challenges.

Date & Time: Wednesday, August 11^th, 2010 at 3PM CST.

Call (512) 989-2230 or email rsvp@peoplebizinc.com.    No cost to attend.  Reserve your space today!

The cycle of natural learning is curiosity> inquiry> knowledge> application. 

We are wired to naturally learn as we go through life.  However, many of  us so called “adults”  however seem to  have given up on this type of thinking and learning, opting instead for finding the “right’ answer.  Why is being “right” more important than learning? 

We all do it in one way or another…  reach for what we know versus what we could learn? I guess it is easier? If I already know how my husband is there is no need to listen, inquire or really communicate. If I already know how my employer is there is no reason to ask for a raise.  The list goes on and on.  Maybe it is some kind of risk management mechanism that our mind likes to play? Keeping us from really engaging in life. Life becomes dry and uneventful. We have been there done that.

As a result, many of us have stopped learning.  The job of a coach is to develop people’s natural ability to grow and learn. When we open ourselves up to the question versus the answer anything becomes possible. Our child-like wonder is awakened.  We experience more and more joy. Opportunities arise. Why? When we are in “the know” we cannot see our own incompetence. Unfortunately, the people around us can! We stay blind to what would be possible if we were to stretch and grow. 

To start opening up to what you could learn, just ask yourself:  “What could I become curious about?”  Or challenge yourself:  “Maybe I could learn something here?” or “What if that isn’t true?”  The question is always more powerful than the answer. Start with all the places you are absolutely certain you are right. Start questioning the validity of your point of view. Be curious, not judgmental. There is a night and day difference. Play with possible points of view, ask: ” How else could someone see this?” or ” what is another possible way to interpret that?” . Remember, your point of view is limited to what you can see. From wherever you are, you can only see part of something.  Thinking our way or opinion is right is what shuts learning and growing down.  All of your answers come from the past.  Aren’t you tired of living there?    

Alicia Marie Fruin

“Notice of Acceptance as an S Corporation.” This acceptance letter specifically einphasi/es the requirement for shareholder- employees to be paid reasonable compensation for the services that they provide to the corporation. The IRS has increased 38 its interest in this area over the past few years, and it is now more likely than ever that the adequacy of a shareholderemployee’s salary could become the subject of an IRS audit. Why Reasonable Compensation Is an Issue One of the advantages of the S corporation business model is the absence of the double taxation inherent in the C corporation model. S corporations are flow-through entities whose ordinary busi- MAY 2D10 / THE CPA JOURNAL ness income is taxable income to the corporation’s shareholders. Ordinary business income is passed through to shareholders in proportion to their ownership interests via reporting cm Schedule K-l. The S corporation is therefore not taxed at the entity level, and the ordinary business income is taxable for federal purposes to individual shareholders on their Form 1040. The ordinary business income passed through to owners is not subject to RCA (Federal Insurance Contributions Act) or FUTA (Federal Unemployment Tax Act) taxes, and it is not subject to self-employment tax (Revenue Ruling 59-221, 1959-1 C.B. 22). These employment taxes comprise Medicate, Social Security, and unemployment taxes. Partnerships and LLCs electing to be treated as partnerships are also flowthrough entities, but all ordinary business income is subject to FICA taxes. It is this difference in the treatment of employment taxes that can cause issues for taxpayers and where CPAs can provide valuable assistance. Salary payments are subject to employment taxes via the employee withholding and employer matching requirements. Shareholders who also work for their own S corporation can save a significant amount of employment taxes if they choose to pay themselves little or no salary’.

Exhibit I shows a simple Excel spreadsheet that can be used to analyze the difference between total tax liability for a shareholder-employee of an S corporation at different salary levels. The table shows that the lower the shareholder’s salary, the less the total tax liability. The taxes on paying a salary of $60,000 compared to no salary are $27,679 – $19,479 – $8,200—a significant savings. Not paying any salary would be an automatic red flag to the IRS, however. A shareholderemployee might set a desired salary at $60,000, but if a reasonable salary is actually $30,000, this would require paying $3,974 ($27,679 – $23,705) more in taxes than is necessary. The IRS wants to prevent this potential loss of tax revenue due to the manipulation of employment taxes, and tax advisors can help clients avoid the potential overpayment of salary and the resulting extra taxes. In order to address this issue, the first step is to establish who is an employee of the corporation.

Who Is an Employee? As mentioned earlier, a shareholderemployee who provides services to a corporation is expected to be paid reasonable compensation and is therefore an employee. An individual hired in the ordinary course of business—not a shareholder or an officer, who is compensated as such— is obviously an employee. In addition, a 2008 IRS fact sheet specifically includes corporate officers within the definition of “employee” for FICA, FUTA, and federal income tax withholding purposes Unless the corporate officers provide only minor or no services, any compensation they receive or are entitled to receive is subject to federal employment taxes. This is noted in the IRS’s instructions for Form 1120S, line 7, which cautions: “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” The tax law thus requires a reasonable salary to be paid to shareholderemployees and officer-employees. If this is not done, the IRS can recharacterize dividends paid in lieu of reasonable compensation as salary under Revenue Ruling 74-44. In addition to classifying payments as dividends, a corporation may classify payments as loans to shareholders or as distributions other than dividends. Regardless of the recorded form of the payment, if reasonable compensation has not otherwise been made, such payments can be reclassitled as compensation. This position has been supported by several court cases: • Joh c. Cvnvn V. 211 F.3d 1269,6m Cir., 2000 (payments received by the taxpayer were compensation for services, not loans) • Veterinary Surgical Consultants. P.C. v. Comm’r, 117T.C. 141, 2001 (The president of the corporation performed “substantial services”: therefore, the remuneration he received was as an employee whose wages were subject to federal employment taxes.) • Joseph M, Grey Public Accountant. P.C. v. Comm’r, 119 T.C. 121, 2002 • Mike J. Graham Trucking, Inc. v. Comm’r, T.C. Memo 2003-49, affirmed, unpublished opinion. 3rd Cir., 4/7/2004 • Superior Proside, Inc. v. Comm’r, T.C. Memo 2003-50, affirmed, unpublished opinion, 3rd Cir., 1/28/2004, ccit. denied, 125 S.Ct. 60, 10/4/2004) • Specialty Transport and Delivery Services, Inc. v. Comm’r, T.C. Memo 2003-5 Knot appealed EXHIBIT 1 Fax Liability Comparison Table for Different Shareholder-Employee Salary Levels X, 100% shareholder, single, claiming standard deduction Ordinary business income before shareholder salary $100,000 Reasonable salary S 60,000 Salary S Corp. Income (K-1) AGI Personal Exemption and Standard Deduction Taxable Income Federal Income Tax Liability Employee FICA (7.65%) Employer Matching (7.65%) FUTA and SUTA (6.2% x max. $7,0001 Total Tax Liability High $60,000 534,976 594,976 (S 8,950) $86,026 $18,065 $4,590 S 4,5SO S 434 $27,679 Medium $30,000 Low $ 0 $67,271 S 100,000 $97,271 S 100,000 ($ 8,950) ! ($ 8,950) $88,321 $18,681 $ 2,295 S 2,295 S 434 $23,705 $ 91,050 $ 19,479 $ 0 $ 0 $ 0 $ 19,479 MAY 2010 / THE CPA JOURNAL 39 EXHIBIT 2 Salary Distribution Curve tor a Retail Store Manager Retail Stare Manager In Daytana Beach, Ra. 32118 10th% 25th% 75th% 90th% 535,459 Source: Salary.com $40,261 S54.412 562,495 Benefit Base Salary Bonuses Social Security 401k/403b Disability Healthcare Pension Time Off Total Median $42,884 $2,650 $3,483 $1,639 S455 $5,722 $2,095 $5,954 $64,883 % of Total 66.1% 4.1% 5.4% 2.5% 0.7% 8.8% 3.2% 9.2% 100% Source: HR Reported data as of September 2009 Job Description: Retail Store Manager Plans and directs the day-to-day operations of a retail store. Develops strategies to improve customer service, drive store sales, and increase profitability. Ensures customer needs are met, complaints are resolved, and service is quick and efficient Ensures all products and displays are merchandised effectively to maximize sales and profitability. Forecasts staffing needs and develops a recruiting strategy to provide optimal staffing in all areas. May require a bachelor s degree or its equivalent at least five years of experience in the field or in a related area. Familiar with a variety of the field’s concepts, practices, and procedures. Relies on extensive experience and judgment to plan and accomplish goals. Leads and directs the work of others. Typically reports to Retail Store Manager, Senior. • Nu-Lovk Design, Inc. v. Comm’r, T.C. Memo 2(103-52, affirmed, 356 F. 3d 290, 3id Cir., 1/26/2004, cert, denied, 125 S.Ct. 60, 10/4/2004 • Water-Pure Systems, Inc. v. Conun’r, T.C. Memo 2003-53, affirmed, unpublished opinion, 3rd Cir., 4/7/2004 For a more detailed discussion of these cases, see James A. Fellow’s and John F. Jewell. “S Corporations and Salary Payments to Shareholders,” The CPA Journal, May 2006. In all of these cases, individual shareholders or officers who were providing services to the S corporation were deemed to be employees and were therefore liable for PICA and FUTA taxes, as well as accrued penalties and interest. These penalties included failure to deposit, failure to file, and negligence penalties. Under IRC section 6656, a 10% penalty may be imposed on the amount due for failure to make the deposit in a timely manner. The amount due includes both the PICA and FUTA due and the required federal withholding tax that should have been deposited. IRC section 6651, which applies to Forms 941 and 940 employment tax returns, imposes a penalty of up to 25% of the amount due. Under IRC section 6662, a penalty of 20% of the underpayment of taxes can be imposed if it is due to negligence or disregard of regulations or rules. Collectively, these penalties are a very significant deterrent and a major reason to pay shareholderemployees a reasonable salary. But what is a reasonable salary? Factors in Determining Reasonable Compensation There are no specific guidelines for reasonable compensation in cither the Internal Revenue Code or Treasury Regulations. Under audit, if no agreement can be reached as to what is reasonable compensation, the courts will rule on the issue, basing its determination on the specific facts and circumstances. The IRS has said that the following factors will be considered by the courts in determining reasonable compensation: • Training and experience • Duties and responsibilities • Time and effort devoted to the business • Dividend history • Payments to nonsharcholder employees 40 MAY 2010 / THE CPA JOURNAL • Timing and manner of paying bonuses to key people • What comparable businesses pay for similar services • Compensation agreements • The use of a formula to determine compensation. (www.irs.govi/newsroom/article/0,,id=20 0293,(X).html) Practical Steps Although the courts treat each case on an individual basis, the main factors the officer or shareholder-employee should consider can be found in the answer to the question: “What would you have to pay someone else to do your job?” This question requires several of the factors listed above to be considered. For example, consider the owner of a small sporting goods store who recently incorporated his business and elected to be treated as an S corporation by filing Form 2553. He is now an employee of his own business and needs to establish and pay himself a reasonable salary. The advisor’s starting point is to ask him the question: ‘”What would you have to pay someone else to do your job?” The main factors to consider arc training and experience, duties and responsibilities, time and effort devoted to the business, and what comparable businesses pay for similar services. The following are ways that a CPA can help such a client use these factors to come to a reasonable salary. • An online salary search is usually quick and painless. One useful site is ww\\ .saliuy.com. Its salary wizard allows a user to search job titles and ZIP aides to see base salary distributions in an area (Exlubit 2). For a fee, a detailed personalised report can be created tailored to a specific job. This type of detail would be very persuasive in establishing a reasonable salary. • A visit to a local employment agency can be a source of useful information. Though it may be a little awkward to explain the situation, an agent may be willing to assist in providing salary information. This encounter can create a good impression and start a professional relationship. • To get a general idea of what an officer’s salary amount might be as a percentage of business sales, go to www.bizslats.com. This site has been used by some IRS agents to assist them in assessing the overall reasonableness of the expenses reported; though not official in any way. it may still help. • There are several different formulas floating around that CPAs can use. such as the 60-40 approach described by Fellows and Jewell in “S Corporation Profits or Payday” (Journal of Accountancy, want to consider a salary somewhere between the 25th and 75th pcrcentilcs.

Making the Case Whatever methods arc used, a gixid idea might be to put together a checklist of steps to be reviewed with a shareholder-owner of an S corporation: n salary. A prudent shareholder-employee will do the necessary research and document how the reasonable salary was established. September 2007). This formula uses a split of 60% salary and 40% distributions (or some variation thereof). Salary could be based on a percentage of net business income before the salary deduction, or it could represent a percentage of gross revenue. • Posting a question on a state society’s discussion tbrum can provide a wealth of information from fellow CPAs about their experiences with the issue. For example, the author posted the following question on the Florida Institute of CPAs listscrv (map_topics.listmanager@ webboardficpa): ”Has anyone assisted an S corporation client where the IRS said the shareholderemployees salary was not reasonable? If so, what factors did the agent look at in determining what they felt was reasonable, and what arguments, if any, were you able to use to assist your client in establishing a lower salary?’ Several useful responses were posted and contacts made to enable further discussion. • The U.S. Department of Labor’s Bureau of Labor Statistics provides an excellent source of salary information at www.bls.gov. Salary information can be accessed by subject area, metropolitan area, and occupational group to create customized tables and statistics on the selected occupation. In determining a reasonable salary, a shareholder-employee may • Discuss the need for a reasonable salary to be established. • Explain the tax savings that can occur and run the numbers, while emphasizing the need for the salary to be deemed reasonable. • Assist in providing sources to assess what a reasonable salary is, as mentioned above. • Document all research done in establishing the salary. • Periodically rcevaluate the adequacy of the salary based on changing economic factors and job markets. A shareholder-employee of an S corporation must be paid a reasonable salary. A prudent shareholder-employee will do the necessary research and document how the reasonable salary was established CPAs can assist in this process. A truly reasonable salary, subsequently reported on the Form 1120S, will likely reduce the chances of being audited. But if an audit occurs, a reasonable IRS agent should appreciate the work and documentation provided and be more inclined to agree that the salary is. in fact, reasonable.

J John R. Ledgerwood, MS (Ace.), CPA, CMA, CFM, is an assistant professor of accounting at Embry-Riddle Aeronautical University, Daytona Beach, Fla.. and president of John R. Ledgerwuod, CPA, PA. MAY 2010/THE CPA JOURNAL 41