Reasonable compensation is a facts-and-documentation issue
The IRS states that S corporations must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions to that person. A useful planning process therefore starts with the work performed—not a generic salary percentage.
Factors worth documenting
- Duties, responsibilities, and time devoted to the business
- Training, experience, and the complexity of the work
- Comparable compensation information for similar roles
- The business’s financial condition and compensation history
- The relationship between payroll and shareholder distributions
Coordinate payroll and tax planning
A compensation decision affects payroll filings, cash flow, and the individual return. Review it before year end so payroll and business records can remain consistent.
Official source
Read the IRS overview of S corporation compensation and medical insurance issues.
