1. What is S-Corp Reasonable Salary?

S-Corp reasonable salary refers to the compensation that shareholder-employees of S corporations must pay themselves for services rendered to the corporation. The IRS requires this salary to be reasonable based on factors like industry standards, responsibilities, and time devoted to the business.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( Revenue \) — Total business revenue in dollars
• \( Percentage \) — Percentage of revenue allocated to salary (typically 20-40%)

Explanation: This calculation provides a baseline estimate for reasonable S-Corp shareholder salary based on a percentage of business revenue, which is a common method used by tax professionals.

3. Importance of Reasonable Salary Calculation

Details: Properly calculating reasonable salary is crucial for S-Corp compliance with IRS regulations. Paying too little salary can trigger IRS audits and penalties, while paying too much may result in unnecessary payroll taxes.

4. Using the Calculator

Tips: Enter your total business revenue and select a percentage between 20-40% based on industry standards and your specific circumstances. Consult with a tax professional for personalized advice.

5. Frequently Asked Questions (FAQ)

Q1: Why is reasonable salary important for S-Corps?
A: The IRS requires S-Corp shareholder-employees to receive reasonable compensation for services before taking distributions to avoid employment tax avoidance.

Q2: What percentage range is typically considered reasonable?
A: Most tax professionals recommend 20-40% of business revenue as a reasonable salary range, though this can vary by industry and specific circumstances.

Q3: What factors determine reasonable salary?
A: Factors include training/experience, duties/responsibilities, time devoted, dividend history, payments to non-shareholder employees, and industry standards.

Q4: Can I pay myself less than 20% of revenue?
A: While possible in some circumstances, paying significantly less than 20% may raise red flags with the IRS and should be supported by strong justification.

Q5: How often should I review my reasonable salary?
A: You should review your salary annually or whenever there are significant changes in your business revenue, responsibilities, or industry standards.