Welcome to the Escaping the Accountants Trap podcast. It's a podcast to help accountants, CPAs and bookkeepers escape what we call the accountants trap. It's where accountants are not getting paid for their value and are forced to work long hours with high, demanding clients with little pay. Well, how do you escape the trap? One way is the topic of today's episode, and that's by leveraging tax planning tools to advise your clients.
To help me with a discussion, I've invited Paul Hammond, the founder and president of RC reports. Paul has educated more than more than 100,000 financial professionals on the topic and has been published in numerous national and state journals. Paul, welcome to the show. Thanks so much for having me on. Adam, I've been looking forward to this podcast for quite some time.
Yeah. So if anybody listening or watching is interested in a very practical way that you can, advise your clients or one simple, practical step that you can take to start advising your clients, this is the episode for you, right? Paul? Absolutely. A lot of accountants are looking for, just kind of that very first simple win.
To quote another favorite person of mine, Gabrielle Fontaine, or just an easy first step to begin the conversation with advisory and reasonable comp is a great tool to look out for that. Okay, so reasonable comp. Explain what that is. I will explain it in as few words as I possibly can. So reasonable comp is really kind of a a a compliance figure for small businesses, small businesses.
When you let's take a step back, small businesses, when you ask a small business owner what they pay themselves or what they should be paying themselves, the answer that I hear the most and chime in, if you hear something different is whatever's left right. So that's a that's a great practical answer. But from a planning and tax standpoint, the IRS has a very vested interest in knowing what that number is from a hypothetical standpoint.
And that hypothetical standpoint is what if you had to step out of your business and replace yourself in that business, what would your replacement cost be? And that, in a nutshell, was what reasonable compensation is. I don't know if you stepped out of your business today, what would it cost you to hire somebody to come in and do exactly what you're doing?
And it's an important number to know for compliance. But it's a very important to number number to know, for, planning, tax planning and advisory planning. Okay. So talk us through in terms of how this can fit into an advisory conversation with a client. Absolutely. So, in my experience, a lot of advisory practices are set up, working with SMEs.
And so when you're starting that conversation with an SMB, if they're walking into your firm for the first time, or maybe they started out as maybe a micro sized business that at the time maybe wasn't even that profitable, was just an idea. But when you get to the point where you're starting to talk with them about a great entry, is entity planning one of the key foundational numbers you need to know for entity planning is reasonable compensation, whether you're looking for, a different passthrough type.
So let's say you're a schedule C or an LLC. Now you're thinking about looking at an S-corp knowing what that reasonable configure is key to know, even if you're looking at moving from a pass through to a non pass through, such as a C Corp, you still need to know that number because it's just, it's just very foundational in helping you figure out what entity might be the best one for you.
From a tax planning standpoint. There are other considerations, of course, on the legal side. But at the end of defining so so really the the idea is that you're advising your client on a tax strategy and this is just one of the first things that you will discuss. Yes. And when you start to discuss reasonable comp with the client, it naturally leads into a number of other conversations.
And the planning is one. But some of the others are retirement. Okay. So what you're paying yourself, for instance, in an S Corp as reasonable comp, that's the only part of what you're earning out of that's corp that applies to Social Security and Medicare. So a lot of business owners overlook that up until the point they hit about 50, 55.
And all of a sudden that becomes very important to them. Or it can become very important to them, depending on what else they've done. However, if you are looking at other retirement vehicles, such as 401 K's, having that reasonable comp figure flushed out plays a huge part in that planning as well. Along with payroll and, tax prep, there's a lot of other conversations that kind of come out of just that entry level conversation of, hey, what is your reasonable comp number?
So how would an accountant come up with this? Or a guide, guide or advisor clients and coming up with a reasonable comp? Great question for that. If you don't mind, I'm just gonna take a tiny step back in history and explain why RC reports exists at all. Okay. I come from the, H.R. And, compensation world.
That was my world up until about ten, 15 years ago. And I, was pulled into the very specific field of reasonable comp at that time, in the late 2000, mostly from a tax compliance standpoint at that time, because there was a huge focus by the IRS on compliance on this. And it took me about two days to do a study that, I wasn't all that comfortable with from a, defensible position standpoint.
And it was frustrating and expensive. So two, three grand for one of these studies, not a lot of small business owners are going to be wild about that. Yeah. So that was really the inception of RC reports. Why can't we do this better and faster. And I found out why. Because it took us two years to do it better and faster.
But we did. In 2012 we launched and we launched RC reports so that we could come up with a way for advisors to determine that reasonable compensation figure. Very, very quickly and very, very economically. And so we took, what is typically a two day process. And most of the people I talk about talk to who do this manually, it is about a two day process.
We boiled that down to 5 to 15 minutes, mainly from the database of wages we've built over the years. And then we've built out three different approaches or methodologies that the IRS accepts as well. And so you can now do this, on a per client basis, for very, very little, depending on what you want to charge your clients.
It's really up to you. But from our standpoint, our service is based on, a subscription model. So it's, about a thousand $1,500 a year, depending on what level you're looking at. That gives you the ability to run as many reports as you like. Interesting. Okay. So you have this conversation with your client about reasonable comp, and then you said that it leads into other, conversations.
So how does that work and how would help us visualize how how an advisory conversation would work with a client. Absolutely. So the typical report that's run out of our reports is called the cost approach, also known as the many hats approach. So let's say that you run this report, with your client, and your client says, hey, like, I wear five hats for my business.
My my main practice is, in a Hvac company, we do, heating, ventilation, air conditioning, etc.. I have 3 or 4 employees, but look how I'm spending my time. I'm spending 20% of my time doing payroll and bookkeeping. Okay. Right. Well, we're going to get all of that detail on where this person is spending their time in this report.
Now we can sit down and say is look at how you're spending your time. Is payroll accounting really where you should be focusing your efforts when you can see where the real payoff in your company is? Let me talk with you about us taking over bookkeeping and payroll for you. By the way, you're a schedule C, and you did $500,000 last year.
And if we ran your reasonable comp, we're only coming out with maybe $90,000 in a reasonable comp report. So now let me show you what that tax savings is. From a payroll tax standpoint, if we shift you to an escort. Okay. And so one of the most popular tools in our software is that entity planning piece where you can put in all the different parameters and say, hey, look, it makes sense.
Or sometimes it doesn't to shift from an LLC or schedule C over to underscore. Got it. Okay. And so then you can essentially upsell or add on or bundle your services depending on what the client needs. Absolutely. And our entity planner includes all of those parameters. So when you show the, the, planner to your client and it's a ten year outlook, if your client, sees that deliverable and says, yeah, let's do it, you've already built in all of your feet.
It's you've built in your 11, 20 years for your payroll fee. Any other fees you want to include, including an analysis fee for making that switch. And so it's like I said, it's just a great first step in the conversation and a great way to get somebody, on to, maybe a subscription model for what you're for, for your firm or whatever.
However, you're starting to build your firm to get off of that, accountant strap off of that hamster wheel. Yeah. Speaking of, how do you suggest somebody monetize this? There's two primary ways we see reasonable compensation. Monetized. First is that those that are adopting the subscription model, they simply add an additional fee into that subscription model for a reasonable compensation study each and every year.
However, if they're running it on a report by report basis, most of the time we see those reports, charged out at, I would say somewhere around 4 or $500 each. We've seen them go much higher. We have seen some firms charge in the neighborhood of of a grand to $1,200 per report. Okay. So and so it's a nice little add on, definitely to your practice.
Is this something that somebody could use to, to acquire clients, like, could they specialize in something like this is I mean, how have you ever seen that? Absolutely. So when they're talking with clients that might be looking for more. Yeah. There are a lot of clients that, do see accountants as commodities, but there are businesses that want more.
And when they are using an accountant who maybe gives them, some of the answers about reasonable compensation, or they feel like maybe there's something they're missing. Running this analysis is a great way to show value and immediately demonstrate where they might be. Some tax savings. Okay. Now, in terms of qualification, can you can bookkeepers do this?
Can enrolled agents do this? Absolutely. Our system is used by, anybody who's in the tax advisory space, right. Regardless of the letters after your name. So we do have a lot of bookkeepers do this because the accountants that they have relationships with or CPAs or eyes simply don't have time, and they're running payroll anyway. This is a natural piece of the payroll process.
EAS and CPAs love us because, when we're getting our clients into compliance, there are penalties on the backside of this for preparers. If they have clients that have unreasonable compensation and they sign off on that, we have seen preparer penalties assessed. And so Eric Green talks about that in some of his courses that revolve around reasonable cost too.
So it's a great way to also mitigate risk from both the client side and from, the practitioner side. Interesting. We just had Eric on our podcast. I started episodes back, so once and the average person using your software that is performing this reasonable, assessment or analysis on their clients, what does their practice look like? Like how what is their business model look like?
How does this fit in with the global picture of their of of their business model? But, when we see reasonable compensation fit in, really just beautifully with and, and accounting practice, this will be part of intake for a new client, regardless of what's going on with that client, we want to know what your reasonable compensation is so that we can take a fresh look at, what services we might be able to offer you.
Right. If we're picking up that, you're spending a lot of time, like I said earlier, on payroll or bookkeeping, and we offer that service, we want to be able to help you out, right? We also want to know where you are on your retirement. And for that, we need to know how much money can we, put toward retirement by looking at what that reasonable time figure is doing, Social Security analysis and that type of thing.
So definitely during intake, if this is a client that you're already working with and they are kind of going through that growth pattern from kind of start up through, now quite profitable, and you want to do an entity planning review with them, do that each and every year. Because it our, our planning tool will show you whether it makes sense or not.
And that can be very valuable. It seems like all small business owners somehow, someway have a friend that knows what entity they should be. We want them talking to the pros about what entity they should be, and our, entity planning tool will help demonstrate that maybe it's not time to move up to an S-corp. There's more compliance costs.
There's more costs in general. And so that's a valuable piece of information to be able to share with the client as well. Yeah. That's interesting. So it almost sounds like this is a fantastic way to almost perform an assessment on a client and a complimentary assessment, maybe even to understand them more, to find out how you can help them grow their business or even save on taxes or whatnot.
This is just one, one additional tool in their arsenal. This is a fantastic tool if you're working with small or medium sized businesses. It's a foundational number to know as you're doing any kind of planning with them. But year to year you can run that same entity planning analysis. It'll still show them what the tax savings are by being an s-corp and or, minimizing that tax burden from, payroll taxes.
So there's a lot of value that you can show your client in a very deliverable, very tangible way with these reports. Interesting. Okay, shifting gears just for a moment, what are some strategies that you found were red flags to avoid when it comes to advising clients and retaining clients and making sure that they see value in your services?
So for the for the accounting practice, this is my biggest suggestion. And you likely have heard this from Eric Green, Don Roland and many others. You're the professional advisor. They need to listen to what you have to say. So if you can get them away from myths in a way, away from asking Google what they might want to do, right?
That's a great a great first step and strategy, because if you are working with them, you want to be driving the bus, not them. Okay. Excellent. Well, Paul, if anybody's listening and they're interested in learning more about your service, your offering and RC reports, where do they go? RC reports.com. There's a wealth of information on there.
Our we have, probably close to 100 different blog articles on very technical topics and on advisory topics all over the place. So take a look at those. But if you're interested and get to know more about the product, I'd say jump on a short demo. They're about 30 minutes long. Our demo team is awesome. They do a great job not only showing the the software, but they have a little fun along the way doing it.
So it's enjoyable process for everybody. And take a look at the tool if it's the right tool for you adopted into your practice. Okay. Perfect. Well, Paul, thank you so much for being with us today. Absolutely, Adam, thank you so much for having me on. As I said at the beginning, I was I've been really looking forward to, jumping on this podcast for quite some time.
Excellent. Well, I'm glad you did. And to everyone listening or watching, thank you so much for spending the last few minutes with us as we discussed how to escape the accountant's trap. Bye for now.