1. What is S Corp Reasonable Compensation?

Reasonable compensation refers to the wages paid to shareholder-employees of S Corporations that reflect what would ordinarily be paid for similar services in similar companies. The IRS requires S Corp owners who work in the business to pay themselves reasonable compensation.

2. How Does the Calculator Work?

The calculator uses the simple formula:

Where:

• \( Base\ Salary \) — The cash wages paid to the employee
• \( Benefits \) — The value of non-cash benefits provided

Explanation: This calculation provides a starting point for determining reasonable compensation, though other factors may need to be considered.

3. Importance of Reasonable Compensation

Details: Paying reasonable compensation is crucial for S Corps to avoid IRS scrutiny. If compensation is too low, the IRS may reclassify distributions as wages subject to payroll taxes.

4. Using the Calculator

Tips: Enter the base salary amount in USD and the value of any benefits provided. Both values should be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes "reasonable" compensation?
A: Reasonable compensation is what similar businesses would pay for similar services, considering factors like experience, responsibilities, and local market conditions.

Q2: Can I pay myself entirely in distributions?
A: No, S Corp owners who provide services must pay themselves reasonable wages before taking distributions.

Q3: What benefits should be included?
A: Include all taxable benefits like health insurance, retirement contributions, and other fringe benefits.

Q4: How often should I review my compensation?
A: Annually, or whenever your job responsibilities or business profitability changes significantly.

Q5: What if I have multiple roles in the company?
A: Compensation should reflect the total value of all services provided to the business.