Reasonable Compensation

[NotEasy]

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?

[KBTS]

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.

[AuditorTurnedGood]

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.

[outwest]

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.

[ED SMITH]

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.

http://stats.bls.gov/oes/2006/may/oes_nat.htm#b13-0000

Check out Occupation code 13-2082.