What does reasonable compensation mean for an S-corp?

It means shareholder-employees are paid wages for the services they actually perform before distributions are taken. The IRS does not publish a single formula, so the number must be defensible based on role, time, and industry.

How often should I revisit reasonable compensation?

At least annually and whenever your role, profit profile, or business model changes. A stale salary is harder to defend than a documented, updated range.

Does reasonable compensation mean I should maximize salary?

No. The goal is a defensible range that reflects your services. Paying too much can erase the S-corp benefit, while paying too little can create compliance risk.

S-corp Reasonable Compensation (US)

A clear way to evaluate reasonable compensation without stepping into tax advice.

If your S-corp salary hasn't moved in a while, you're exposed. Not because the number is "wrong," but because the IRS expects shareholder-employees to be paid reasonable compensation for services before distributions are taken. That standard is fact-specific, and the burden is on you to show your numbers make sense. See the IRS guidance on S-corp compensation for shareholder-employees and corporate officers. (https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers)

Priority consideration: evaluate whether your salary reflects the services you actually provide and the way your business generates revenue.

Why it matters: under-paying wages can trigger payroll tax reclassification, while over-paying wages can reduce the benefit of an S-corp structure. (https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)

Key takeaways

Reasonable compensation is a defensible range tied to your real services.
Documentation matters as much as the number.
Revisit the range annually or after material changes.

What "reasonable compensation" means

It is a defensible salary range for the work you actually perform as a shareholder-employee. The IRS does not publish a single formula, so your job description, comparables, and business model do the heavy lifting.

A clean framework (no formulas, no hype)

Define the job you actually do. List your real responsibilities, hours, and the roles you cover (sales, ops, delivery, management). The IRS looks at what services are performed, not just titles. (https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)
Benchmark a range. Pull two or three comparables for similar roles in similar businesses. This is a range, not a magic number.
Tie pay to how the business earns. If revenue is mostly driven by your personal services, wages should be meaningful. If revenue comes primarily from other employees or capital, that shifts the balance. (https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)
Document and revisit annually. Reasonable comp is not "set once." Keep notes on role changes, profit changes, and why the current salary still makes sense.

Decision checklist

Has your profit profile changed since your salary was set?
Are you doing materially different work than when the salary was chosen?
Do you have a defensible range based on comparable roles?
Is the business primarily driven by your personal services?
Is this documented in a way you'd be comfortable sharing with your CPA?

Questions to ask your CPA

What range looks defensible for my role, industry, and time commitment?
How does a salary change affect total tax, not just payroll?
What documentation should we retain if the IRS asks?
How often should we re-evaluate this?

IRS: S-corporation compensation and reasonable compensation guidance
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
IRS: S-corporation officers, employees, and wages
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers

S-corp Reasonable Compensation (US)

Key takeaways

What "reasonable compensation" means

A clean framework (no formulas, no hype)

Decision checklist

Questions to ask your CPA

Pilot state guides (S-corp tax savings)

California

Florida

Illinois

New York

Texas

Utah

Colorado

Next step

Compliance note

Sources

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