“Reasonable compensation” is an ever-moving target; however there have been enough test cases to remove some subjectivity from this measure, depending mostly on industry and total income for each business.
The IRS asks that all S-Corporation officers (usually the shareholders of the company) take a reasonable salary based on the industry averages (i.e. what would you be paid for your services as a W2 employee on the open job market) and the net income of the business.
Thanks to our experience in the industry, we have come up with several variables to help us determine the right salary to take for you: net income from the business, amount of equity distributed (what’s referred to as “owner’s draw” in a sole proprietorship) and estimated personal tax liability. We will conduct a reasonable compensation study for you, to determine what’s the proper amount to maximize your tax savings while keeping you compliant.
Watch this video to learn more about reasonable compensation:
Want to learn more about why you should take a salary? Click here.