Reasonable compensation for an S-corporation owner

In general, S-corporation owners are required to receive reasonable compensation for the services they provide to the company. This is because S-corporations are pass-through entities, which means that the profits and losses of the company are passed through to the shareholders' personal tax returns.

The IRS has not set a specific definition for what constitutes reasonable compensation, but they do provide some guidance. They suggest that reasonable compensation should be based on the following factors:

1. The duties and responsibilities of the shareholder-employee

2. The amount of time and effort devoted to the business

3. The qualifications and experience of the shareholder-employee

4. The nature and complexity of the business

5. The size and financial performance of the business

6. The prevailing compensation levels for comparable positions in similar companies

It is important to note that the IRS will scrutinize S-corporation owners who receive little to no compensation, as this can be seen as an attempt to avoid paying employment taxes. In some cases, the IRS may reclassify distributions as wages and assess additional taxes and penalties.

To determine a reasonable compensation level for an S-corporation owner, it is often helpful to consult with a tax professional or compensation expert. They can provide guidance on industry standards and help ensure that the compensation level is defensible in the event of an IRS audit.