S-Corp Reasonable Compensation & Salary in 2027

S-corp owners who also work in their business have to pay themselves a reasonable salary before they take money out as distributions. In general, a reasonable salary is what the business would have to pay someone else to do the same work in the same area, and the IRS still points to the same nine factors it listed in 2008 when it judges one. What is new for 2027 are several of the numbers and rules around that salary: a higher Social Security wage base, inflation adjustments to the QBI deduction, and changes to how the IRS funds and organizes its enforcement work.

This guide starts with what has changed for 2027, then walks through the rule itself, why the salary matters for your taxes, what happens when the IRS decides a salary is too low, and how to document one that holds up.

What's changed for 2027

• The Social Security wage base is $192,300, up from $184,500 in 2026. Salary up to that amount carries the full 15.3% payroll tax.
• The qualified business income (QBI) deduction is permanent, and for 2027 its income threshold and its $400 minimum deduction are adjusted for inflation.
• Congress has taken back $41.8 billion of the $45.6 billion the Inflation Reduction Act set aside for IRS enforcement, about 92%.
• The IRS has a pass-through unit, working since October 2024, that can examine S-corps of any size.

What hasn't changed is the standard itself. There is still no IRS formula and no approved percentage split between salary and distributions, and the test is still market pay for the work the owner actually does. The rest of this guide explains that standard and how to meet it.

What is a reasonable salary for an S corp in 2027?

Treasury Regulation §1.162-7(b)(3) defines reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. The IRS says there are "no specific guidelines for reasonable compensation in the Code or the Regulations," so in practice the salary should match what the company would have to pay to hire someone to do everything the owner does.

Two things that often drive an owner's salary do not count:

• The owner's personal needs, such as a mortgage or living expenses.
• A fixed share of profit. The 60/40 rule of thumb (pay 60% of net profits as salary and take the other 40% as distributions) is not an IRS rule. The 60/40 Rule Is a Myth explains why.

Duties change as the business changes, and market pay changes with them, so the analysis is worth redoing every year when the return is prepared. WageProof's guide to S-corp reasonable compensation covers the full definition and the IRS standard.

The nine IRS factors for evaluating reasonable compensation

To decide whether a salary meets that standard, examiners and courts use a multi-factor test that traces back to Mayson Mfg. Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949). The IRS lists nine factors the courts have considered in Fact Sheet FS-2008-25:

1. Training and experience brought to the role
2. The duties and responsibilities actually carried
3. How much time the business takes from the owner
4. Dividend history, meaning the salary-to-distribution ratio over time
5. Payments to non-shareholder employees for comparable work
6. Timing and manner of bonuses to key people
7. What comparable businesses pay for similar services
8. Compensation agreements, meaning formal documentation
9. Whether the compensation was set by a formula

The IRS weighs all the facts together. Wage data can back up three of these factors directly (training, duties and comparable pay), which is why a documented salary analysis focuses on them. The Nine IRS Factors for Reasonable Compensation, Explained covers each one.

Why the salary matters: payroll tax and the 2027 wage base

The reason the IRS cares about the salary comes down to payroll tax. Salary carries 15.3% in payroll tax (FICA, the Social Security and Medicare taxes), split between the company and the employee. Distributions carry none, which is why some owners pay themselves too little. (S-Corp Distributions: How They Are Taxed covers distributions in more detail.)

How much tax is at stake depends on the Social Security wage base, the yearly cap on wages subject to the Social Security part of the tax. For 2027, according to the Social Security Administration:

• Wages up to $192,300 carry the full 15.3%: 12.4% for Social Security and 2.9% for Medicare.
• Wages above $192,300 carry only the Medicare part, 1.45% on each side, plus the 0.9% Additional Medicare Tax for high earners.
• The most one employee can owe in Social Security tax on 2027 wages is $11,922.60. The employer owes the same.

So on payroll tax alone, a lower salary saves money, especially below $192,300.

How the QBI deduction affects the salary decision

Payroll tax is not the only tax that depends on the salary. The qualified business income (QBI) deduction under Section 199A does too, and it does not always point the same way:

• The One Big Beautiful Bill Act (Pub. L. 119-21), signed July 4, 2025, made the deduction permanent.
• The owner's salary is not QBI, so more salary means a smaller 20%-of-QBI amount. That also favors a lower salary.
• Above an income threshold, though, the deduction is also capped by the W-2 wages the business pays, including the owner's salary. When that cap applies, a higher salary raises the deduction.
• Since 2026, the phase-in range for specified service businesses has been $75,000 for single filers and $150,000 for joint filers. A minimum $400 deduction applies to a taxpayer who materially participates in a business with at least $1,000 of QBI.
• For 2027, the income threshold, the $400 and the $1,000 are all adjusted for inflation. Take the exact numbers from the IRS's annual inflation-adjustment revenue procedure (Rev. Proc. 2025-32 had 2026's), not from this page.

How the QBI Deduction Affects an S-Corp Salary Decision works through the tradeoff. Neither tax changes the standard, though. The salary still has to match market pay, and if it falls short, the IRS can correct it.

What happens if the IRS decides the salary is too low

Examiners look for officer pay that is small compared with distributions. If they decide the salary is too low, they reclassify distributions as wages, and the business then owes:

• FICA on the reclassified amount, both the employer and employee shares when the owner already took some W-2 salary. If the owner took no salary at all, a reduced rate under IRC §3509 generally applies to the employee's share.
• Interest, usually from the date the payroll tax was first due.
• Possibly a 20% accuracy-related penalty under IRC §6662. It is not automatic.

The business can avoid the interest if it agrees to the examiner's figures on Form 2504 (the IRS form for agreeing to additional payroll tax) and pays the tax by the time it files that form. That relief is not available if the same issue came up in an exam of an earlier period, if the business knowingly underreported, or once the IRS has assessed the tax and demanded payment.

This is not a rare problem. A 2021 report by the Treasury Inspector General for Tax Administration (TIGTA 2021-30-042) found:

• 49.5% of S-corporations reported no officer compensation.
• 266,095 single-shareholder returns from processing years 2016–2018 showed profits over $100,000 and no officer compensation. TIGTA estimated those returns alone may have left nearly $25 billion in compensation unreported and about $3.3 billion in FICA tax unpaid.
• An IRS program focused on S-corp officer pay examined the issue 12,362 times in FY 2016–2018. TIGTA reports average results of about $17,726 per return from those exams, without breaking that figure into tax, interest and penalties.

IRS enforcement heading into 2027

How likely an exam is depends on IRS enforcement, which has shifted since 2024. On one side, the IRS has built up tools aimed at pass-through businesses. Returns are scored by computer before anyone reads them, and the IRS runs filters that pick out S-corps reporting no officer compensation. In October 2024 the IRS announced (IR-2024-276) that its pass-through field operations unit in the Large Business & International division had "officially started work." The unit covers partnerships, S-corps and trusts, and it opens pass-through exams regardless of the entity's size, so a one-owner S-corp is in scope. As of its October 1, 2026 update, the IRS's LB&I division page lists a Pass-Through Entities Practice Area.

On the other side, most of the extra enforcement money is gone:

• The Inflation Reduction Act gave the IRS $45.6 billion for enforcement.
• Congress rescinded $41.8 billion of it, about 92%, in laws passed in 2023, 2024 and 2025, according to TIGTA (Report 2026-IE-R014, September 2026).
• By March 31, 2026, the IRS had spent 97.7% of the enforcement money that was left.
• Regular yearly funding continues. The Consolidated Appropriations Act, 2026 gave the IRS $5 billion for enforcement in fiscal 2026.

Less money does not remove the filters or the pass-through unit, so an S-corp paying its owner little or nothing can still be picked out.

What the court cases show

When a salary dispute reaches court, the outcome turns on evidence. Plenty of S-corp salaries were set in a quick conversation with a CPA or by a rule of thumb, with nothing written down. These three cases show what happens when the IRS asks for support:

• David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012). An accounting firm owner paid himself $24,000 a year while the firm paid his S-corp $203,651 for 2002 and $175,470 for 2003, and the rest came out to him as dividends. The court adopted the government expert's market analysis, built mainly from the AICPA's Management of an Accounting Practice survey of accounting firms and adjusted for region. It set his reasonable compensation at $91,044, and the company owed back payroll taxes on the difference.
• Joseph Radtke, S.C. v. United States, 895 F.2d 1196 (7th Cir. 1990). An attorney who was the corporation's only shareholder and only full-time employee took no salary and $18,225 in dividends. All of it was reclassified as wages subject to FICA.
• Clary Hood, Inc. v. Commissioner, 69 F.4th 168 (4th Cir. 2023). This is a C-corp case, but it applies the same §162 reasonable-compensation standard the IRS uses for S-corps. The Tax Court preferred the IRS expert's fully documented analysis, built on comparable companies in the same industry. The Fourth Circuit upheld the tax owed but threw out the $282,398 accuracy-related penalty for 2016. The company had planned to make up past under-payment in installments, put that plan in writing to its tax advisors, and relied on their approval.

In Watson and Clary Hood, the court sided with the expert who backed the number with market data, and in Clary Hood a written plan was enough to remove the penalty. What Happens When the IRS Challenges an S-Corp Salary covers these cases and the audit process in more detail.

How to document a defensible salary

That makes documentation the main defense. A salary file that holds up usually comes from these steps:

1. List the owner's duties in detail, such as bookkeeping, sales calls, client work, hiring and marketing, with a rough share of hours for each. This decides which occupations the salary is compared against.
2. Match each duty to wage data from the Bureau of Labor Statistics (BLS) Occupational Employment and Wage Statistics program. It covers 800+ occupations across 500+ metropolitan and nonmetropolitan areas, broken down by percentile. It is free, and IRS experts have used it in Tax Court cases.
3. Say how experience level and location were handled. The same occupation pays differently in different parts of the country.
4. Consider a range. The Reasonable Compensation Job Aid for IRS Valuation Professionals says reasonable compensation "might best be viewed as a range." Running both the Cost and Market approaches gives two figures to compare.
5. Record the decision in the corporate minutes: a board resolution, dated when the review happened, saying the salary was reviewed and approved against market data. Documentation made at the time carries much more weight than an analysis put together after an IRS notice arrives.

Someone reading the documentation should be able to follow the reasoning to the number. A sample report shows what finished documentation looks like, and the methodology page has the calculations behind it.

Get your 2027 S-corp salary documented

Owners who want that protection in place for 2027 can follow the steps above in a spreadsheet or have WageProof do the analysis. With WageProof, the owner describes the role in our S-corp reasonable compensation calculator, and we match the tasks to BLS wage data for the county's wage area (or a broader or older figure where the local one is not published) and the owner's experience level. The result is a documented report, about 15 minutes' work, to file with the corporate minutes and give to the CPA.

CPAs reviewing clients' salaries before year-end payroll can use Year-End S-Corp Reasonable Compensation for CPAs to plan that review.

The best time to document the 2027 salary is before payroll starts in January and before any IRS notice arrives. When you're ready, start your 2027 report.