Resources
Reasonable compensation — the salary an S-Corp owner must pay themselves before taking distributions — is one of the most scrutinized numbers on an S-Corp return, and getting it wrong is a leading trigger for IRS audits and back-payroll-tax assessments. These guides explain how the IRS defines reasonable compensation, the factors the Tax Court actually weighs, the leading court cases, and how to document a defensible S-Corp salary using Bureau of Labor Statistics (BLS) wage data rather than a rule-of-thumb percentage.
Whether you’re an owner setting your own pay or a tax pro preparing reasonable compensation reports for clients, start with the pillar guide below, then dig into the specific cases and planning strategies.
S-Corp Reasonable Compensation: What It Is & How the IRS Defines It
The complete guide — the IRS standard, the factors courts weigh, the leading cases, and how to document a defensible number. Read the guide →
10 articles
Can AI Calculate S-Corp Reasonable Compensation?
AI chatbots can't set S-corp reasonable compensation reliably. Tested on real BLS wage data, they fabricated inputs and missed by tens of thousands.
How to Pay Yourself From an S-Corp
S-corp owners get paid two ways: a W-2 salary and profit distributions. How each is taxed, why the split matters, and how to set a defensible salary.
S-Corp Distributions: How They Are Taxed
S-corp distributions are mostly not taxable — profit is taxed at pass-through. How they work, the basis rules, and why a reasonable salary must come first.
S-Corp Tax Deductions: What You Can Deduct
Key S-corp tax deductions: salary, the >2% health-insurance rule, accountable-plan reimbursements, and retirement plans — plus what isn't deductible.
The 9 IRS Factors (FS-2008-25) & the Job Aid
IRS Fact Sheet FS-2008-25 lists the nine factors for evaluating S-corp salaries; the IRS Job Aid organizes its own factor discussion under five areas.
When the IRS Challenges Your S-Corp Salary
If the IRS decides your S-corp salary is too low, they reclassify distributions as wages. Here's how audits work, what they cost, and how to prepare.
S-Corp 60/40 Rule Is a Myth — What IRS Looks At
The 60/40 salary-to-distribution rule has no IRS basis. Tax Court has explicitly rejected arbitrary percentage formulas. Here's what to do instead.
Cost vs. Market Approach for Comp Methods
The IRS recognizes multiple approaches for calculating reasonable compensation. Here's how the Cost and Market approaches work and when to use each one.
QBI Deduction & Your S-Corp Salary Decision
S-corp reasonable compensation affects the QBI deduction: higher salary means less QBI, but too low triggers the IRS. Here's how to navigate it.
Every S-Corp needs a number they can stand behind.
Generate a defensible reasonable compensation report in about 15 minutes using BLS wage data.
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