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    Reasonable Compensation

    What is reasonable wage to a S-corp shareholder-employee? Is there a guideline or a formula to determine it?

    Suppose a Corporation elected to be treated as an S-corp. And then the shareholder employee continues to receive the same amount of salary as before. Is it reasonable compensation?

    #2
    Click on the "Search this Forum" button and type in "reasonable compensation". You will get lots of discussions on this topic and lots of opinions as well.

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      #3
      That is

      the $64,000 question. For my clients (and myself, as an S-corp owner/officer), we determine that amount based on what they pay for their health insurance, any fringe, and then usually a nominal number based on the profits of the company, allowing them to still have a passthrough of income on the k-1, or what would be the point of the entity? I have a collegue who uses one of the salary guides published by Robert Half. The rules state the comp should be "reasonable" given the industry, revenues, profit before S-corp officer's comp, level of service, etc. Seems as long as you can give them a good explaination of how you got to the number, and it makes sense, you're ok.
      "Congress has spoken to this issue through its audible silence."
      Anyone ever notice they beat the daylights out of the definition of a child, but they don't spend much time at all defining "parent"?

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        #4
        An absolute rule assumes..

        that the situation is so simple.

        At a recent seminar, the question was asked of a IRS S Corp Tech advisor. No clear line in the sand was drawn. He teaches 3 factors to auditors:
        1. Services provided by the officer: If most of the profits come from his efforts, the comp should be higher.
        2. Services provided by other employees: If much of the profits arise from 40 other employees, the % of officer comp could be lower.
        3. Capital and assets: If much of the profits are from invested capital, % of officer comp could be lower. (ex: property rental)

        This is a facts and circumstances issue and no clear answer can be provided. He did list sites like salary.com as starting points for the analysis, but not as a safe harbor.

        To me, this is one of those areas where a mentor early in my career said you must lean more heavily on art rather than science for the best answer. On the other hand, I don't think we'll get preparer penalties for a well documented good faith effort to arrive at the correct amount.

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          #5
          There is a web site that has occupations and salary range by zip code. I aven't been able to find it, but the governments labor statistics gives a starting point.


          Check out Occupation code 13-2082.

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