1. What is IRS Reasonable Salary Requirement?

The IRS requires S corporation officer-employees to receive reasonable compensation for services performed. This calculator helps determine what constitutes "reasonable" based on market comparable salaries for similar roles.

2. How Does the Calculator Work?

The calculator uses the IRS principle:

Where:

• Comparable Salary — Market rate salary for similar positions in your industry and geographic area

Explanation: The IRS considers multiple factors but emphasizes comparable wages as primary evidence of reasonable compensation.

3. Importance of Reasonable Salary

Details: Paying unreasonably low salaries to avoid payroll taxes is a common IRS audit target. Proper compensation helps maintain S corp status and avoids penalties.

4. Using the Calculator

Tips: Research comparable salaries using industry surveys, job postings, or salary data tools. Enter the most accurate market rate for your specific role.

5. Frequently Asked Questions (FAQ)

Q1: What factors does IRS consider for reasonable salary?
A: Training/experience, duties/responsibilities, time/effort devoted, comparable salaries, and what others would pay for similar services.

Q2: Can I pay myself entirely in distributions?
A: No. The IRS requires compensation for services rendered before taking distributions.

Q3: How often should I reassess my reasonable salary?
A: Annually, or whenever your role responsibilities change significantly.

Q4: What if no exact comparable exists?
A: Use the closest comparable and document your research methodology.

Q5: What are the penalties for unreasonable salary?
A: Reclassification of distributions as wages, back payroll taxes plus penalties and interest.