How to Set Your S-Corp Reasonable Salary

BUSINESS · ENTITY · S-CORP & C-CORP · 9 MIN · Filed by Isabella

The IRS has a position. Your accountant has a position. You need to know both.

The S-corp reasonable salary is the single most-audited question in small-business tax — not because the rule is complicated, but because it is fuzzy and the incentive to break it is large. The IRS does not publish a formula; they publish a framework. Here is how to set a number that is defensible.

Procedure

Identify the primary work you actually do, not your title. Are you the electrician who owns the electrical company, or the operator who manages crews? Most owners are a mix. Estimate the percentage of your time on the trade versus on running the business. This split is the backbone of the whole calculation.
Pull market salary data for that work in your area. Bureau of Labor Statistics Occupational Employment Statistics (oews.bls.gov) is the standard source. Salary.com and Glassdoor are secondary. Get three data points for the trade rate and three for the management rate.
Adjust for your experience, then blend the two rates. Fifteen years in the trade moves you toward the top of the range; two years stays near the bottom. Calculate: (percent of time on trade × trade rate) + (percent of time on management × management rate). That blended number is your anchor.
Sanity-check against the business and the IRS factor list. The salary should be a meaningful portion of what the business produced, not a token. The IRS looks at nine factors including training, duties, dividend history, comparable pay, and whether you have a written compensation agreement. Your number should be defensible on every one.
Document the methodology in a one-page memo to your file. Date it. Keep it. "That is what my accountant told me to pay" is not a defense. "BLS OES data for a licensed electrician in my metro, blended 70/30 trade/management, adjusted for fifteen years of experience" is a defense. Revisit the number every year.

Key figures

RANGE: $60–85K — typical 1-owner, $200K–$500K rev
PAYROLL TAX: 15.3% — up to SS wage base; +2.9% Medicare
IRS FACTORS: 9 — reasonable-comp evaluation framework

About the writer

Isabella — Small business — operator, three founded, two still running. Isabella has opened three businesses, closed one, and wrote the financial operating manuals for the other two. She's the person founders text at 11pm when the books don't tie.