S-Corp Reasonable Compensation Court Cases

An owner who works in an S corporation can take money out of the business in two ways: a salary, paid through payroll like anyone else's wages, or distributions of the company's profit. The salary carries Social Security and Medicare taxes, 15.3% on most salaries, and distributions don't. Because a lower salary means less payroll tax, the IRS requires an owner who works in the business to take a reasonable salary: roughly what the business would have to pay someone else to do the same work.

The tax law gives no formula for that figure. When an owner and the IRS disagree about it, a court decides, using the evidence each side brings. This page walks through the main court decisions on S-corp owners' salaries, and the older cases where courts worked out the tests they still use. Each case has a short section on what happened, what the court decided and what the case teaches, with the closest occupation in Bureau of Labor Statistics (BLS) wage data for the owner's work. What Happens When the IRS Challenges an S-Corp Salary covers what happens during an IRS exam of the salary and what the back taxes, interest and penalties come to.

What the cases have in common

Most of these cases were decided by the U.S. Tax Court, a federal court that hears disputes between taxpayers and the IRS, or by a federal district court after the company paid the tax and sued for a refund. Several went on to a federal court of appeals, known as a circuit. The IRS's fact sheet on S corporation officer pay says there are "no specific guidelines for reasonable compensation in the Code or the Regulations," and the courts decided each case on its own facts. Even so, the same issues come up in many of them:

• Companies called the owner's money dividends, distributions, contractor fees or loan repayments. Courts treated it as wages anyway, because under the payroll tax regulations a corporate officer who does more than minor work for the company and is paid in any form is an employee.
• A low salary was treated much the same as no salary. In Watson, the Eighth Circuit said that for payroll tax there is little difference between paying an owner no salary and paying one too low to reflect the work.
• Courts gave little weight to pay agreements owners signed with themselves, to what owners said they intended, and to testimony about hours that no record backed up.
• In the payroll tax cases that discussed it, the company had to prove that the IRS's salary figure was wrong. Comparisons with a job narrower than the owner's actual role were given little weight.
• The IRS's expert used different wage data from case to case. The same IRS valuation engineer testified in Watson, JD & Associates and McAlary and relied mainly on a different source each time: a survey of accounting firms, industry financial ratios and state occupational wage data.
• In Glass Blocks Unlimited and McAlary, where the company had filed no payroll tax returns, the Tax Court also sustained penalties for not filing them and not depositing the tax.

The S-corp cases at a glance

Here are the eleven S-corp cases in brief, in the order they appear below. Six of the eleven owners were accountants or lawyers.

• Radtke (7th Cir. 1990): a lawyer took no salary and $18,225 as dividends; all of it was wages.
• Spicer (9th Cir. 1990): a public accountant took all of his income as dividends; the dividends were wages.
• Veterinary Surgical Consultants (Tax Ct. 2001): a veterinary surgeon's company paid out all of its net income to him; the payments were wages.
• Barron (Tax Ct. 2001): a CPA took a $2,000 salary in 1994 and none in 1995 or 1996; he was an employee.
• Grey (Tax Ct. 2002): an accountant was paid $6,000 and $7,200 as contractor fees; he was an employee.
• Nu-Look Design (3d Cir. 2004): a home-improvement contractor took the company's profits as he needed them; he was an employee.
• Scott Singer (Tax Ct. 2016): an RV service company paid its owner's bills as loan repayments; the owner won because the loans were real.
• JD & Associates (D.N.D. 2006): a CPA paid himself $19,000 to $30,000 a year; the salary was too low and the IRS's figures were upheld.
• Watson (8th Cir. 2012): a CPA paid himself $24,000 a year; reasonable pay was set at $91,044.
• McAlary (Tax Ct. 2013): a real estate broker took no salary and transferred $240,000 to himself; reasonable pay was set at $83,200.
• Glass Blocks (Tax Ct. 2013): a glass-block distributor took no salary and $30,844 and $31,644 in distributions; all of it was wages.

Were the payments wages at all?

In the first group of cases the owner took no salary, or only a token one, and the question was whether the money the owner took out counted as wages at all. Payroll taxes apply only to wages, so each company argued that its payments were something else. In every case but the last, the court disagreed.

Joseph Radtke, S.C. v. United States

• Case: Joseph Radtke, S.C. v. United States, 895 F.2d 1196 (7th Cir. 1990), affirming the district court
• Owner's work: lawyer, the corporation's only full-time employee
• Closest BLS occupation: Lawyers, SOC 23-1011

Joseph Radtke, a Milwaukee lawyer, was his S corporation's sole director and sole shareholder as well as its only full-time employee. In 1982 it paid him no salary and $18,225 in dividends, with no payroll tax on any of it. The Seventh Circuit agreed with the district court that the dividends were wages, because they were plainly pay for his work as a lawyer.

What it teaches: pay for the owner's work is wages, even when the company calls it a dividend.

Spicer Accounting, Inc. v. United States

• Case: Spicer Accounting, Inc. v. United States, 918 F.2d 90 (9th Cir. 1990)
• Owner's work: licensed public accountant, the firm's only accountant
• Closest BLS occupation: Accountants and Auditors, SOC 13-2011

Mr. Spicer worked about 36 hours a week as his firm's only accountant and took all of his income as dividends, believing that let the firm avoid payroll taxes. The Ninth Circuit held that the dividends were wages because he performed substantial services, and that his intention had no bearing on how they were taxed. It also denied relief under section 530, a rule that spares a business back payroll taxes when it had a reasonable basis for not treating a worker as an employee, because "a corporation's sole full-time worker must be treated as an employee."

What it teaches: the owner's reasons for taking dividends instead of a salary did not change how the payments were taxed.

Veterinary Surgical Consultants, P.C. v. Commissioner

• Case: Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141 (2001), aff'd sub nom. Yeagle Drywall Co. v. Commissioner, 54 F. App'x 100 (3d Cir. 2002)
• Owner's work: veterinary surgeon and consultant
• Closest BLS occupation: Veterinarians, SOC 29-1131

Dr. Kenneth Sadanaga's corporation provided surgery and consulting to veterinarians, and all of its income came from his work, at least 33 hours a week. For 1994 through 1996 it paid him its entire net income, between $83,995.50 and $173,030.39 a year, and reported it as his share of profit on Schedule K-1 (the form that reports each owner's share), with no W-2 (the form that reports an employee's wages) and no payroll tax returns. The Tax Court held that the payments were wages, calling the distribution label "but a subterfuge for reality." The case decided whether the payments were wages, not how much salary would have been reasonable.

What it teaches: reporting the owner's pay as profit on a K-1 does not keep it out of payroll tax, because the S-corp pass-through rules apply to income tax only.

Wiley L. Barron, CPA, Ltd. v. Commissioner

• Case: Wiley L. Barron, CPA, Ltd. v. Commissioner, T.C. Summary Opinion 2001-10
• Owner's work: CPA, the firm's only CPA, with two clerical employees
• Closest BLS occupation: Accountants and Auditors, SOC 13-2011

Wiley Barron's Arkansas accounting firm paid him a $2,000 salary in 1994 and none in 1995 or 1996, while distributing between $53,257 and $83,341 a year. During the exam an IRS agent proposed salaries of $45,000, $47,500 and $49,000, based on Robert Half International salary data for Arkansas CPAs with a similar practice. The Tax Court held that Barron was the firm's employee and the firm had no section 530 relief; it did not rule on the agent's figures, which summaries of the case sometimes credit to the court. As a summary opinion, it can't be cited as authority in other cases.

What it teaches: a token salary did not change the outcome, and the IRS started from a salary survey for the owner's profession and state.

Joseph M. Grey Public Accountant, P.C. v. Commissioner

• Case: Joseph M. Grey Public Accountant, P.C. v. Commissioner, 119 T.C. 121 (2002), aff'd, 93 F. App'x 473 (3d Cir. 2004)
• Owner's work: public accountant, bookkeeper and tax preparer
• Closest BLS occupation: Accountants and Auditors, SOC 13-2011

Joseph Grey did all of the client work, bookkeeping and management of his Philadelphia accounting and tax firm. Instead of a salary, the firm paid him $6,000 and $7,200 on Forms 1099-MISC (the form for payments to independent contractors), and he reported the rest of its income as his S-corp share. The Tax Court held that he was an employee, because the tax code counts any corporate officer as an employee whatever the usual employer-employee tests would say, and the regulations exempt only an officer who does little or no work and receives no pay. The Third Circuit affirmed.

What it teaches: an officer who runs the business is an employee, so paying the owner as an outside contractor on a Form 1099 does not avoid payroll tax.

Nu-Look Design, Inc. v. Commissioner

• Case: Nu-Look Design, Inc. v. Commissioner, 356 F.3d 290 (3d Cir. 2004), affirming the Tax Court; the Supreme Court declined to hear the case
• Owner's work: ran a home-improvement company doing carpentry, siding and general residential work
• Closest BLS occupation: Construction Managers, SOC 11-9021

Ronald Stark single-handedly managed his home-improvement company: he found the customers, kept the books, and hired and supervised the workers. Instead of a salary, the company paid its net income to him as he needed it, between $7,103.60 and $14,216.37 a year. The Tax Court and the Third Circuit held that he was an employee and that the company had no reasonable basis for treating him otherwise.

What it teaches: the same rule applied to a small business whose owner took out between about $7,100 and $14,200 a year.

Scott Singer Installations, Inc. v. Commissioner

• Case: Scott Singer Installations, Inc. v. Commissioner, T.C. Memo. 2016-161
• Owner's work: ran a business servicing, repairing and modifying recreational vehicles
• Closest BLS occupation: Recreational Vehicle Service Technicians, SOC 49-3092

Richard Scott Singer borrowed $646,443 personally between 2006 and 2008 and advanced it to his company, which recorded the advances as shareholder loans. In 2010 and 2011, while losing money and paying him no wages, the company paid $181,872.09 of his personal bills, including his mortgage, as loan repayments, and the IRS called the payments wages. The Tax Court held that the advances through 2008 were real loans even without promissory notes or interest, so the payments were not wages. Advances after 2008, when no outside lender would lend to the company, were capital instead.

What it teaches: money paid to an owner can be a real loan repayment, but only for advances the company recorded as loans and could reasonably expect to repay when they were made; compare Glass Blocks Unlimited, below.

How much salary was reasonable?

Once a court decides the owner was an employee, the next question is how much of what the owner received was pay for work. In this second group the company paid a low salary or none, and the court settled on a figure by weighing the evidence each side brought about what the work was worth.

JD & Associates, Ltd. v. United States

• Case: JD & Associates, Ltd. v. United States, No. 3:04-cv-59 (D.N.D. May 19, 2006)
• Owner's work: CPA running a small accounting firm (tax work, bookkeeping and financial statement reviews)
• Closest BLS occupation: Accountants and Auditors, SOC 13-2011; the court also discussed Chief Executives, SOC 11-1011

Jeffrey Dahl owned a Fargo, North Dakota accounting firm whose profits ran far above comparable firms'. He paid himself $19,000 to $30,000 a year, only slightly more than his staff, plus year-end dividends of $47,000 to $50,000. The IRS's expert compared his pay with officer pay at accounting firms as a share of sales, using Risk Management Association industry ratios at the upper quartile because the firm was so profitable. The court held that salaries of $69,584, $79,823 and $79,711 would have been reasonable and entered judgment for the government. It gave less weight to a North Dakota wage survey that listed accountants and chief executives separately and had no data for officers of accounting firms.

What it teaches: a salary close to the staff's pay was too low for an owner running a very profitable firm, and a wage survey that covered only part of the owner's role was given less weight.

David E. Watson, P.C. v. United States

• Case: David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012), affirming the district court
• Owner's work: CPA and one of the main revenue producers at an accounting firm
• Closest BLS occupation: Accountants and Auditors, SOC 13-2011

David Watson, a CPA with nearly 20 years of experience, worked 35 to 45 hours a week at an Iowa accounting firm through his S corporation. The corporation paid him $24,000 a year, the amount the partners thought the firm could afford to pay each of them, and nothing was written down about how that figure was chosen. His share of the firm's profits, $203,651 for 2002 and $175,470 for 2003, went to the corporation, which passed everything left after his salary and expenses to him as dividends. The government's expert, relying mainly on the AICPA's Management of an Accounting Practice survey adjusted for region, valued Watson's services at $91,044 a year. The district court adopted that figure, and the Eighth Circuit affirmed, noting that "there is little difference if the employer pays no salary or pays a low salary that does not accurately reflect all remuneration for employment."

What it teaches: a salary based on what the firm could afford, with no written analysis behind it, gave the court nothing to weigh against the IRS expert's figure.

Sean McAlary Ltd., Inc. v. Commissioner

• Case: Sean McAlary Ltd., Inc. v. Commissioner, T.C. Summary Opinion 2013-62
• Owner's work: real estate broker running a small brokerage
• Closest BLS occupation: Real Estate Brokers, SOC 41-9021

Sean McAlary, a California real estate broker since 2004, ran every part of his small brokerage and often worked 12-hour days. In 2006 the company paid him no wages while he transferred $240,000 from its account to his own. The IRS's expert took the median hourly wage for real estate brokers in southern California, $48.44, from the California Occupational Employment Statistics survey (now OEWS), produced jointly with the Bureau of Labor Statistics, and multiplied it by 2,080 hours (a 40-hour week for 52 weeks) to reach $100,755.

The court was not persuaded by a board resolution fixing McAlary's base pay at $24,000, because he "sat on both sides of the table" and there was no evidence the company ever paid him under it. Weighing the wage statistics in the expert's report with market conditions, McAlary's somewhat limited experience and the company's modest operations, it held that $40 an hour, or $83,200 for the year, was reasonable. With no payroll tax returns filed, the court also sustained additions to tax for not filing them and penalties for not depositing the tax. As a summary opinion, it "shall not be treated as precedent for any other case." It is also the case closest to how WageProof prices a salary: the IRS's expert matched the owner's main job to an occupation in government wage data for the owner's area and priced it by the hour.

What it teaches: a board resolution setting the owner's pay carried little weight, because the owner approved it himself and there was no evidence the company paid under it.

Glass Blocks Unlimited v. Commissioner

• Case: Glass Blocks Unlimited v. Commissioner, T.C. Memo. 2013-180
• Owner's work: ran a company selling and distributing glass blocks, doing nearly all of the work himself
• Closest BLS occupation: General and Operations Managers, SOC 11-1021

Fredrick Blodgett was the only full-time worker of a Costa Mesa, California company that sold and distributed glass blocks. It paid him no salary in 2007 or 2008 but distributed $30,844 and $31,644 to him. The company argued that some of the money repaid his loans and that a reasonable salary was $15,860: 20 hours a week at $15.25 an hour, from salary websites for a shipping clerk and two accounting clerks. The Tax Court found no real loans, since there were no notes, interest, security or repayment schedule, and found his role larger than any of those clerk jobs. He had told the examiner he worked over 40 hours a week and the company's website listed weekday hours of 8 to 5, so the court gave his 20-hour testimony "little weight." Even at $15.25 an hour, a full-time year supported the full distributions, so all of it was wages. Because no payroll returns had been filed, the penalties for not filing and not depositing stood.

What it teaches: testimony about hours given after the fact, with no records, carried little weight, and comparisons with clerk jobs were rejected because the owner did nearly all of the company's work.

Where the tests come from: cases about pay that was too high

Most of the tests for reasonable pay come from a different kind of case. A C corporation pays income tax on its own profit and can deduct salaries but not dividends, so in those cases the IRS argues that the owner was paid too much, with profit paid out as salary to cut the company's tax. The courts apply the same standard as in the S-corp cases: the amount that "would ordinarily be paid for like services by like enterprises under like circumstances" under Treasury Regulation §1.162-7(b)(3). The S-corp payroll tax cases borrow it: Watson noted that reasonable compensation is usually an income-tax question and applied it to payroll tax anyway, and Glass Blocks Unlimited applied the factors from Elliotts, below.

Mayson Mfg. Co. v. Commissioner

• Case: Mayson Mfg. Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949)
• Owners' work: three officer-shareholders of a Michigan valve maker: the president and general manager, who designed many of its products; the head of manufacturing; and the sales manager
• Closest BLS occupations: Chief Executives, SOC 11-1011; Industrial Production Managers, SOC 11-3051; Sales Managers, SOC 11-2022

Mayson paid its three officers a base salary plus a bonus or commission under a plan its board adopted in 1929. The IRS disallowed part of their 1943 pay, the Tax Court agreed, and the Sixth Circuit reversed. It listed factors such as the employee's qualifications and work, the size of the business, salaries compared with the company's income and dividends, and pay for comparable positions, said the situation "must be considered as a whole with no single factor decisive," and noted that the IRS had offered no witness on what the pay should have been.

What it teaches: the multi-factor approach that later courts trace back to Mayson is set out here, and a court can only weigh the evidence put in front of it.

Elliotts, Inc. v. Commissioner

• Case: Elliotts, Inc. v. Commissioner, 716 F.2d 1241 (9th Cir. 1983)
• Owner's work: chief executive and sole shareholder of an Idaho John Deere equipment dealer, also doing the work of its sales and credit managers
• Closest BLS occupations: Chief Executives, SOC 11-1011; Sales Managers, SOC 11-2022

Edward Elliott worked about 80 hours a week running a dealership with 40 employees and more than $5 million in sales, for $2,000 a month plus a bonus of 50% of net profits, the formula used since the company was formed. The Tax Court cut the deductions for his pay from $181,074 and $191,663 to $120,000 and $125,000, and the Ninth Circuit reversed. It grouped the factors into five areas (the employee's role, comparison with similar companies, the company's character and condition, conflicts of interest, and internal consistency) and said it helps to ask "whether an inactive, independent investor would be willing to compensate the employee as he was compensated."

What it teaches: the independent-investor question comes from this case, and a pay plan the company had applied consistently for years counted in its favor.

Exacto Spring Corp. v. Commissioner

• Case: Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir. 1999)
• Owner's work: cofounder, chief executive and principal owner of a precision-spring manufacturer, also its chief salesman and principal inventor
• Closest BLS occupations: Chief Executives, SOC 11-1011; Mechanical Engineers, SOC 17-2141

Exacto paid William Heitz $1.3 million in 1993 and $1.0 million in 1994. The IRS would allow $381,000 and $400,000, and the Tax Court, applying a multi-factor test, settled on $900,000 and $700,000. Judge Posner's opinion for the Seventh Circuit said the Tax Court had "cut the baby in half" and applied the independent-investor test instead: when investors earn a far higher return than they had reason to expect, the executive's pay is presumptively reasonable. Exacto's investors were earning more than 20% against the 13% the IRS's own expert said they required, so the company won. The court also faulted the company's expert for adding up four full-time salaries for the four jobs Heitz did part-time.

What it teaches: an owner who does several jobs part-time isn't necessarily worth the full-time salaries of all of them added together; Cost Approach vs. Market Approach explains pricing each job for the share of time it takes.

Brewer Quality Homes, Inc. v. Commissioner

• Case: Brewer Quality Homes, Inc. v. Commissioner, T.C. Memo. 2003-200, affirmed by the Fifth Circuit
• Owner's work: president and half-owner of a Louisiana retailer of manufactured homes
• Closest BLS occupation: Chief Executives, SOC 11-1011

The company paid Jack Brewer $762,186 for 1995 and $863,559 for 1996, and the IRS would allow $604,117 and $485,966. The Tax Court applied the Fifth Circuit's multi-factor test from Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315 (5th Cir. 1987). Finding no published pay survey for mobile-home retailers, it used industry ratios of executive pay to sales at about the 90th percentile, added $5,000 for 1995 for Brewer's personal guarantee of a bank loan and about 5% for the retirement benefits he didn't receive. That came to about $550,000 for 1995 and $630,000 for 1996, and because the IRS had already agreed to more than that for 1995, the court allowed $610,000 and $630,000.

What it teaches: with no pay survey for the exact business, the court started from the closest industry data and adjusted it for the owner's circumstances.

Miller & Sons Drywall, Inc. v. Commissioner

• Case: Miller & Sons Drywall, Inc. v. Commissioner, T.C. Memo. 2005-114
• Owners' work: three brothers who owned a Fargo drywall contractor; two of them worked mainly as job-site supervisors
• Closest BLS occupation: First-Line Supervisors of Construction Trades and Extraction Workers, SOC 47-1011; the experts in the case compared the supervisors with Construction Managers, SOC 11-9021

The IRS said this C corporation overpaid its three owners. For the two brothers who supervised job sites, both sides' experts used a Minnesota state salary survey of construction managers, and the brothers had been paid above its 90th percentile. Noting that the survey's hourly figures assumed a 40-hour week while the brothers worked 55 to 60 hours, the Tax Court annualized the 90th-percentile wage at 55 hours a week, about $121,235 a year. The brothers' pay still ran 23.7% to 100.6% above that, which the court said their experience and the scope of their work supported. It called the pay comparison neutral and, weighing all the factors, held that all of the owners' pay was reasonable.

What it teaches: long hours, once a court accepts them as fact, can justify pay above a wage table built on a 40-hour week.

Thousand Oaks Residential Care Home I, Inc. v. Commissioner

• Case: Thousand Oaks Residential Care Home I, Inc. v. Commissioner, T.C. Memo. 2013-10
• Owners' work: a married couple who ran an assisted living facility in Thousand Oaks, California; he oversaw operations, finances and maintenance, and she, a registered nurse, managed resident care
• Closest BLS occupations: General and Operations Managers, SOC 11-1021 for him and Medical and Health Services Managers, SOC 11-9111 for her, the occupations the IRS's expert used

The owners had taken little or no salary in lean years, then paid themselves packages, including pension contributions, totaling $1,701,287 for 2003 through 2005. The IRS's expert used wages from the BLS Occupational Employment Statistics program (now OEWS), adjusted for California and full-time work, and the court found the owners' actual pay far above those figures. It accepted part of the pay as catch-up for earlier underpayment, but held that the packages left too little for a reasonable return to an investor, found the couple overpaid by $282,615 in total, and disallowed the salary paid to their daughter.

What it teaches: catch-up pay for lean years can be recognized, but the company still has to leave its owners a reasonable return.

Clary Hood, Inc. v. Commissioner

• Case: Clary Hood, Inc. v. Commissioner, T.C. Memo. 2022-15, aff'd in part and vacated in part, 69 F.4th 168 (4th Cir. 2023)
• Owner's work: founder and chief executive of a South Carolina land-grading and excavation contractor
• Closest BLS occupation: Chief Executives, SOC 11-1011

With revenue of $44 million in 2015 and $69 million in 2016, the company paid Clary Hood a $5 million bonus each year on top of his salary, partly to make up for earlier underpayment. The Tax Court gave the company's two expert reports little to no weight because of dubious assumptions and missing calculations, and accepted the IRS expert's figures, built on survey data for comparably sized site-preparation contractors with an allowance for past underpayment: $3,681,269 for 2015 and $1,362,831 for 2016. The Fourth Circuit affirmed those amounts but vacated the $282,398 penalty for 2016, because the company had planned to make up the underpayment in installments, discussed the plan with its tax advisors, who approved it as reasonable, and relied on their advice.

What it teaches: an expert report needs its data and calculations shown, and good-faith reliance on advisors who approved the pay plan can remove a penalty even when the pay itself is cut.

What to keep on file

Several of these cases turned on what the company could show about how the salary was set. Based on what the courts looked at, an owner, or the owner's CPA, should keep these records for each year:

1. What the owner does. A short description of the owner's work in a typical week. The salary should be compared with jobs that match all of that work. In Glass Blocks Unlimited, the company compared the owner with clerks, and the court rejected that because he did nearly all of the company's work.
2. How many hours the owner works. A calendar, timesheets or a note in the minutes, made during the year. In Glass Blocks Unlimited, the owner's testimony about his hours, with no records, got little weight.
3. Where the salary figure came from. The wage data used, the occupation, the area, the year of the data and the experience level, written down when the salary was set. In Watson, the salary was what the partners thought the firm could afford, and nothing was written down about how it was chosen.
4. The board's approval. Minutes or a resolution that state the salary and the analysis behind it, and payroll records showing the salary was paid. In McAlary, a resolution setting the owner's pay counted for little because there was no evidence the company paid it.
5. Payroll tax filings. The salary paid through payroll, with the quarterly Form 941 and yearly Form 940 filed. In Glass Blocks Unlimited and McAlary, the companies hadn't filed them and owed penalties on top of the tax.
6. A new analysis each year. The owner's work, hours and the wage data all change, and each tax year is judged on its own facts.

The IRS's own list of nine factors courts have considered, in Fact Sheet FS-2008-25, is explained in The Nine IRS Factors for Reasonable Compensation. WageProof's guide to S-corp reasonable compensation covers the rest of the rules.

Building the record with WageProof

WageProof produces the third record on that list: a dated record of where the salary figure came from. The owner describes the work and how the week splits between different kinds of work. The report prices each kind of work using BLS wage data for that occupation, in the owner's area and at the owner's experience level. A report can instead price the owner's main job as a single occupation. It uses the BLS data for the tax year, adjusted for wage growth when the tax year is newer than the latest BLS survey, and a broader or older figure when BLS doesn't publish one for the owner's area. The PDF is dated, can be kept with the corporate minutes, and lists the source of every wage figure, so your CPA, an IRS examiner or anyone else can check it against BLS.gov. The sample report shows what one looks like, and Is BLS Data Enough for Reasonable Compensation? explains the limits of BLS data.

CPAs and other tax preparers can use these cases in a client's file. A short memo can note which case fits the client's situation, such as Watson for a low salary with large distributions, Glass Blocks Unlimited for hours, or Radtke and Spicer for an owner who took no salary, and attach the dated report and the board's approval. WageProof for CPA firms produces the report for each client, and Year-End S-Corp Reasonable Compensation for CPAs covers the review before the last payroll of the year.