According to the IRS website, reasonable compensation in relation to S Corporations is as follows:
“Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.”
What does this mean? Calculations of reasonable compensation can include all services that the shareholder employee provides. If they answer the phone, if they file, if they do other services, this can be used to calculate shareholder compensation. Court cases have used a calculation similar to this, and a Public Accounting company had less than 50% of the net income of the company required to be paid as reasonable compensation. This is an area that calculations can bring in a lower reasonable compensation than people think. There are software packages that can calculate this compensation to minimize it. This is an area that should be explored to potentially save payroll taxes. If you want to discuss this further, please call or email us and we can discuss it.
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