Figuring Out Reasonable S Corp Officer Compensation
Paying yourself a “reasonable” salary as an S corp shareholder is tricky but important to maximize tax savings. At my firm Bright Hill Advisors (BHA), we’ve specialized in reasonable compensation for 15 years.
First, remember the only benefit of an S corp is reducing self-employment tax on distributions.
But the IRS requires S corps to pay “reasonable” wages to shareholders before making distributions.
If your salary is unreasonably low, the IRS can reclassify distributions as wages.
So what is “reasonable” compensation?
That’s the million dollar question!
The IRS looks at factors like:
- Your experience, qualifications
- Duties and time devoted
- What similar businesses pay
- Company’s condition
- Consistent wage program
But no single factor controls. BHA determines reasonable salary through:
- IRS data on S corps by industry
- Tax court cases
- Labor stats from Bureau of Labor Statistics
- Proprietary analysis from RCReports
We also consider your business model – if you’ve built an enterprise with less reliance on you as owner, it helps justify lower wages.
BHA starts with a rule of thumb: 1/3 wages, 1/3 expenses, 1/3 distributions. We customize from there based on your situation.
Determining exact reasonable compensation is more art than science.
But getting in the ballpark through BHA’s experience saves you payroll tax and reduces audit risk.
Contact BHA if you need help determining an appropriate, customized S corp wage!
We offer reasonable compensation reports and ongoing payroll planning/tax projections.