What is Reasonable Compensation?

“WHAT IS REASONABLE COMPENSATION FOR MYSELF”, is a common question we are asked?

In 2005, the IRS began studying this area of compliance and updated their guidelines.

Reasonable compensation is the wage or salary you pay yourself for work performed by you, for your company, before distributions. Distributions are not compensation.

Reasonable compensation is a requirement for all shareholders of an S Corporation who perform services. It can be viewed through two different options:

1. Replacement Cost - The amount you would have to pay someone to perform your current duties.

2. Fair Market Value - The amount you would be paid to perform the same duties and services to another business, in which you are not a shareholder.

One may ask, “How can I determine reasonable compensation for myself?” The answer is, we have the tools to help you make this determination. The tools require answering a set of questions based on the services you provide to your company, and rating yourself in a range from below average to above average. The tools will take into consideration the demographics for the region you are performing services, and research of others working in the same field of work. Once all questions are answered, an unbiased report will be prepared. The report will provide you a basis of an acceptable compensation level to be compliance with IRS guidelines and regulations.

If you find yourself asking this question, the best time to determine your reasonable compensation figure is now, before incurring the high cost of an IRS examination. Reasonable compensation challenges can be costly.

If you have additional questions or want more information on how to determine your reasonable compensation, reach out to us for further information. Let’s make sure you avoid a costly reasonable compensation challenge by the IRS.

Heather Richardson