Reasonable Compensation
The wage an S corporation must pay a working owner before taking distributions, measured by what comparable businesses pay for similar services.
An officer of an S corporation who performs more than minor services is an employee, and payments for those services are wages subject to payroll tax. The IRS expects the corporation to pay reasonable compensation before distributions, and it can recharacterize distributions as wages when the salary is too low.
No formula or percentage fixes the amount. IRS Fact Sheet 2008-25 lists the factors: training and experience, duties, time devoted, distribution history, pay to non-owner employees, bonus timing, what comparable businesses pay, compensation agreements, and use of a formula. Bureau of Labor Statistics wage data is a common source of comparables.
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