Understanding Reasonable Compensation for S Corp Owners

What is Reasonable Compensation?

Reasonable compensation is the salary you pay yourself for the services you provide to your S Corporation. It should reflect what you would pay someone else to do the same work.

Why It Matters

Salaries are subject to payroll taxes (Social Security and Medicare), but distributions are not. The IRS requires a salary to prevent underpayment of taxes and ensure compliance.

How to Determine Reasonable Compensation

To determine your salary:

• Consider your role, skills, and time spent in the business.

• Compare salaries in your industry for similar roles.

• Factor in the size and profitability of your business.

Consequences of Non-Compliance

If your salary is deemed unreasonably low, the IRS may reclassify distributions as wages, leading to:

• Back taxes

• Penalties

• Interest

Best Practices

• Document your role and hours worked.

• Use industry benchmarks to set your salary.

• Work with a CPA to ensure compliance.

For personalized guidance on reasonable compensation, contact us today.