Why Every S-Corporation Owner Needs a Reasonable Compensation Basis

For business owners operating as S-corporations or closely held corporations, the concept of reasonable compensation is not just a suggestion. It is a legal requirement with significant tax consequences. The IRS closely monitors how much owners pay themselves in wages compared to distributions. Failure to establish and document a reasonable compensation basis can trigger audits, penalties, and costly adjustments.

Reasonable compensation refers to the amount that would ordinarily be paid for similar services by similar businesses under similar circumstances. In simple terms, if you hired someone else to perform your job duties, how much would you pay them? The IRS expects S-corporation owners actively involved in the business to pay themselves a salary that reflects the fair value of their services before taking additional profits as distributions.

The challenge for many business owners is determining what qualifies as reasonable. Factors such as industry standards, geographic location, business size, duties performed, hours worked, and market wages all play a role. Without clear documentation supporting the salary level, business owners are exposed to unnecessary audit risk.

This is where Steve Perry, EA at Books Taxes & More makes a significant difference. Steve specializes in preparing comprehensive, audit-proof reasonable compensation studies. His process goes far beyond guesses or arbitrary rules of thumb. Each study is built using industry data, government statistics, detailed job descriptions, and a thorough analysis of the business owner’s specific role and responsibilities.

The IRS repeatedly emphasizes the need for proper documentation when it comes to reasonable compensation. Business owners who rely on informal estimates or online calculators often find themselves poorly positioned during an audit. In contrast, Steve Perry, EA develops each study with the depth and evidence the IRS expects. His studies have never lost in an IRS audit.

A professionally prepared reasonable compensation study offers several important benefits. First, it helps S-corporation owners avoid overpaying payroll taxes by setting salaries appropriately — not too high and not too low. Second, it provides confidence knowing that, if audited, the business has solid, defensible evidence to support its compensation decisions. Finally, it demonstrates to the IRS that the business is following best practices, which can help discourage aggressive enforcement.

Many reasonable compensation issues arise when S-corporation owners attempt to minimize payroll taxes by paying themselves minimal wages while taking large distributions. While tax planning strategies exist, they must always be supported by a defensible compensation structure. The cost of failing to do so can far exceed any short-term tax savings.

If you own an S-corporation and have never completed a formal reasonable compensation study, now is the time to act. The IRS continues to make this area a focus, and proactive preparation is the strongest defense. Steve Perry, EA at Books Taxes & More is ready to help. With years of experience and a perfect audit track record, Steve provides S-corporation owners with the confidence that their compensation structure is both compliant and optimized.

Contact Steve Perry, EA today to schedule your Reasonable Compensation Study and protect your business with an audit-proof defense.