S Corp Reasonable Compensation Guidelines

S Corp reasonable compensation must reflect what similar employees would earn: Legal Requirement: IRC Section 162 requires reasonable compensation for services performed. Courts and IRS scrutinize artificially low salaries designed to avoid payroll taxes. Factors to Consider: Role and Responsibilities: CEO vs. employee-level duties. Time Devoted: Full-time vs. part-time involvement. Industry Standards: Compensation surveys for similar positions. Company Performance: Business profits and cash flow. Experience and Skills: Owner's qualifications and expertise. Geographic Location: Local market rates. Safe Harbor Guidelines: 50-60% Rule: Many practitioners use 50-60% of business profit as reasonable salary. Market Rate Approach: Pay what you'd pay an unrelated person for same work. Industry Benchmarks: Use Bureau of Labor Statistics or compensation surveys. Documentation: Maintain records supporting compensation decision. Board resolutions or written justification. Consequences of Getting It Wrong: Too Low: IRS can reclassify distributions as wages, imposing payroll taxes and penalties. Too High: Unnecessarily increases payroll tax burden. Best Practice: Document decision with market data, review annually, consider multiple factors beyond simple percentage rules.