Is BLS Data Enough for Reasonable Compensation?

An S corporation gives its owner two main ways to take money out of the business. A salary goes through payroll like any employee's pay. A distribution is a share of the profit. Salary carries Social Security and Medicare taxes, 15.3% in total on most salaries, and distributions don't.

If that were the whole story, every owner would pay themselves almost nothing and take the rest as distributions. So the IRS requires an owner who works in the business to take a reasonable salary first. "Reasonable" means roughly what the business would have to pay someone else to do the same work. Tax professionals call this reasonable compensation, and WageProof's complete guide covers the full IRS standard. When the IRS thinks a salary is too low, it can challenge it. In one case described below, the Tax Court, a federal court that hears disputes between taxpayers and the IRS, decided what the owner's salary should have been.

To put a dollar figure on that, a common starting point is wage data from the Bureau of Labor Statistics (BLS), the federal agency that tracks pay and jobs. Its Occupational Employment and Wage Statistics program, called OEWS, draws on a survey of about 1.1 million workplaces. It publishes pay for about 830 occupations in about 530 areas, counting both metropolitan areas and the nonmetropolitan areas that cover the parts of states outside them. For each occupation it publishes in an area, it gives a range of pay. At the 10th percentile, 10% of workers earn less. At the 90th, 10% earn more. The median, or 50th percentile, is the middle, where half earn more and half earn less.

An owner shopping for a reasonable-compensation report will find two broad kinds. A black-box report runs the owner's answers through a private database using calculations the provider keeps confidential, so the reader sees the result, and perhaps a description of the method, but can't recompute the figures. A transparent report uses public data, such as BLS, and a published method, so anyone can see where each figure came from. Which kind to choose turns on two questions, taken in order below: is BLS data enough, and does it matter whether anyone can check the figures?

WageProof builds the transparent kind, so it has a stake in the answer. What follows is what the IRS, the courts and BLS itself have said, including where BLS data falls short.

Yes, for most owners

Our answer is that for most owners, BLS data supplies the wage figures, and the owner's duties, hours and company facts supply the rest.

No database, public or private, can set the salary on its own. The salary also depends on what the owner does all week, how many hours that takes, how much experience they bring, and facts about the company. Those come from the owner and their accountant. Once they're written down, BLS data supplies what each part of the work pays. Each wage figure can then be checked against the public BLS tables by anyone, including an IRS examiner, the IRS employee who reviews a return in an audit.

There are real exceptions, covered below: very high earners, larger companies and a few professions that have their own pay surveys.

The data is only one part of the salary

A wage figure on its own isn't reasonable compensation. A common shortcut is to look up one job title, take the median wage and stop there. Courts have rejected that kind of comparison when the job title didn't match the owner's actual work.

In Glass Blocks Unlimited (2013), the owner said he worked 20 hours a week and that $15,860 a year was enough pay. To support that, he pointed to median wages for a shipping clerk, an accounts receivable clerk and an accounts payable clerk, taken from salary websites. The Tax Court declined to rely on the comparison, finding that his role was more substantial than any one of those jobs.

The IRS's own fact sheet on S-corporation pay points the same way. It says the tax law and its regulations give "no specific guidelines for reasonable compensation." It then lists nine factors that courts have considered. Only one of them is what comparable businesses pay for similar work. The others are facts about the owner and the company, such as training and experience, duties, time spent, the company's dividend history (its record of paying out profits to owners) and what it pays employees who aren't owners.

None of those facts are wage data, so no wage database supplies them. A wage database can't know how many hours a particular owner works, or how the week splits between selling, managing and doing the work itself. Someone has to ask the owner and write the answers down.

The fix for the one-job-title shortcut is more careful use of the data, along with the owner's facts. The method WageProof suggests for most owners lists the owner's duties and estimates the share of the week each one takes. Each duty is then priced at the wage for the occupation that does that work, and the pieces are added up. A gym owner who spends most of the week training clients is priced mostly as a personal trainer, with the rest of the week priced as a manager. This is called the cost approach, because it adds up what it would cost to hire people for each part of the owner's work, and WageProof runs it on BLS wages.

What the IRS and the courts have done with BLS data

None of the IRS guidance we reviewed requires a particular source of wage data. The fact sheet names no data source. The IRS also published the Reasonable Compensation Job Aid, a reference guide written in 2014 for the IRS staff who value businesses. The guide lists several kinds of salary surveys and company data, and it requires none of them. Although it says it is not an official IRS position, it shows how the IRS's own specialists approach the question. The guide also says reasonable compensation "might best be viewed as a range," which leaves room for judgment about where in that range an owner belongs.

In several court cases, the IRS's own experts have started from government wage data. The clearest example is Sean McAlary Ltd., Inc. v. Commissioner (2013). A real estate broker's S corporation paid him no salary and $240,000 in distributions. The IRS's expert priced his work using California's Occupational Employment Statistics survey (now OEWS), which the state produced jointly with BLS as part of the same wage program. That survey put the median wage for real estate brokers in southern California at $48.44 an hour.

The Tax Court weighed those wage statistics together with general market conditions, the broker's somewhat limited experience and the company's modest operations. It held that $40 an hour, or $83,200 a year, was reasonable. The ruling was a summary opinion, a kind of Tax Court decision that is not treated as precedent for other cases. Even so, it shows how the court used the government wage figure: as evidence it weighed with the owner's facts, which here brought the rate below the median.

None of the court opinions we read rejected government wage data because it came from the government. Courts did reject wage comparisons for other reasons. Usually the comparison didn't fit the owner's actual work, as in Glass Blocks, or, as in Clary Hood, described below, the reports didn't show their data and calculations and rested on doubtful assumptions.

Where BLS data falls short

BLS publishes wages by occupation and area. It publishes them by industry only at the national level, apart from some state figures it labels research estimates, and it doesn't break them out by the size of the workplace at all. BLS itself notes that workers at large workplaces generally earn more than workers at small ones. So a local median mixes pay from many industries and workplaces of every size, which can make it a rough fit for a small company. A WageProof report states this limit on the page, and the methodology explains how each figure is chosen.

A few other limits matter too:

• The figures include commissions and bonuses tied to the work a person produces. They leave out year-end bonuses and other bonuses not tied to output, profit sharing, stock bonuses and the cost of benefits.
• They come out about a year after the survey month. The May 2025 figures, for example, were published on May 15, 2026, so a figure used for a later tax year is usually adjusted for wage growth.
• Not every occupation is published in every area. A rare job in a small area may only have state or national figures.
• At the very top of the pay scale, BLS sometimes shows only that pay is at or above a stated cutoff, not the exact figure.

Because of those limits, BLS data alone isn't the right tool for some owners:

• Owners paid near the top of the scale, where the published figures run out.
• Larger companies, where executive pay surveys and the pay figures in public companies' filings are closer comparisons. The IRS's Job Aid lists salary surveys and public companies' filings among its sources.
• Professions with their own owner-pay surveys. In Watson (2012), an accounting-firm case, the IRS's expert used surveys of accounting practices. The trial court adopted his figure, and the appeals court upheld it.

Separately, a dispute headed to trial usually needs an expert witness anyway.

In WageProof's view, most small S-corp owners don't fall into any of those groups. For them, BLS data is all the wage data needed, as long as it comes with a written record of the owner's duties, hours and reasoning.

Black box or transparent: what the Tax Court weighed

When the IRS challenges a salary and the case goes to trial, the court often has to decide whose analysis to believe. Clary Hood, Inc. v. Commissioner (2022) shows how the Tax Court weighed the two sides' expert reports in one case.

That case was the reverse of the usual S-corporation dispute. Clary Hood was a regular corporation, one that pays tax on its own profits. The salaries it pays are subtracted from those profits before tax, so a very high owner salary lowers the company's tax bill. That is why, with regular corporations, the IRS sometimes argues that an owner was paid too much. Clary Hood paid its chief executive, who owned the company with his wife, a $5 million bonus in each of two years, and the IRS said that was more than reasonable.

The company brought two expert reports, and the court gave both little or no weight. It said the first "lacked necessary supporting calculations and did not include all underlying data." It said the second also left out its calculations and didn't adequately disclose its data sources. It also found problems with the assumptions both reports made. The court relied on the IRS expert instead, in part because he disclosed his sources, methods and calculations.

The IRS expert's figures came from paid industry surveys matched to the company's industry and size, which the court found acceptable. That means private data isn't the problem in itself, and it can add detail BLS doesn't publish.

So the difference between the two kinds of report is whether the reader can check the work. A black-box report may draw on finer detail, but its figures come out of calculations the reader can't see. That doesn't make them wrong, but an examiner or the owner's own accountant can't recompute them and has to rely on the provider. A transparent report built on BLS data can name the source of each wage figure: the occupation and its BLS code, the area, the data year and the percentile. Anyone can open the same tables and check the published wage. When a wage is carried forward to a later tax year, the report also prints the index readings and the formula used, so the adjustment can be checked too.

WageProof's view is that for most owners, being able to check every figure matters more than the extra detail a black box can offer, so a transparent report is clearly the better choice.

What a complete record looks like

Whatever kind of report an owner uses, the written record behind the salary should answer the questions an examiner is likely to ask. A complete record includes:

• A written list of the owner's duties and roughly how the week divides among them.
• The hours worked, and how they're known.
• For each duty, the occupation used, the area, the data year and the percentile, with the reason for that percentile. The reason is usually experience, since a more experienced owner usually sits higher in the range.
• Facts about the company, such as what it pays other employees, its history of salary and distributions, and anything unusual about the owner's role.
• A date showing the analysis was done when the salary was set, before any IRS letter arrived.

WageProof produces the wage data and method parts of that record. The owner picks their duties from WageProof's list, or searches BLS's own occupation titles, and says how much of the week each takes. WageProof then prices each duty from BLS data for the BLS area that BLS assigns to the owner's county. When the tax year is later than the survey, the figure is adjusted for wage growth. When that area has no figure for an occupation, the report uses other BLS data, such as state or national figures, and says so. Every wage figure is printed with its BLS source, as the sample report shows. The facts about the company and the judgment calls stay with the owner and their accountant.

For a side-by-side look at WageProof and an established alternative, see the comparison page.