1. What is Reasonable Compensation for S Corps?

Reasonable compensation refers to the appropriate salary that S Corporation shareholder-employees must pay themselves for services provided to the company. The IRS requires S Corps to pay reasonable compensation to shareholder-employees before making non-wage distributions.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• Industry Salary — Market-rate salary for similar positions in your industry
• Adjustments — Additional compensation factors based on experience, qualifications, and specific contributions

Explanation: This formula helps determine a fair salary that reflects both market standards and individual circumstances while complying with IRS requirements.

3. Importance of Reasonable Compensation

Details: Properly determining reasonable compensation is crucial for S Corps to avoid IRS penalties, ensure tax compliance, and maintain proper corporate governance. Underpaying can lead to reclassification of distributions as wages with back taxes and penalties.

4. Using the Calculator

Tips: Research industry-standard salaries for your position and location. Consider adjustments for specialized skills, experience level, education, and additional responsibilities beyond typical roles.

5. Frequently Asked Questions (FAQ)

Q1: Why is reasonable compensation required for S Corps?
A: The IRS requires shareholder-employees to receive reasonable compensation to prevent tax avoidance through artificially low salaries and excessive distributions.

Q2: What factors determine reasonable compensation?
A: Key factors include training/experience, duties/responsibilities, time spent, dividend history, payments to non-shareholder employees, and what comparable businesses pay.

Q3: How often should reasonable compensation be reviewed?
A: Annually, or whenever there are significant changes in job duties, business performance, or industry standards.

Q4: What are the consequences of not paying reasonable compensation?
A: The IRS may reclassify distributions as wages, resulting in back payroll taxes, penalties, and interest charges.

Q5: Can I use industry salary surveys for determination?
A: Yes, industry salary surveys from reputable sources are excellent references for establishing market-rate compensation benchmarks.