Reasonable compensation reports for S corporation owners
Support shareholder-employee pay with role-based analysis, relevant wage data, and a written salary rationale you can put to work.
* We will contact you to arrange a call about your situation, service scope, and pricing. Specific tax advice and ongoing planning are provided under an engagement.
Reasonable compensation for shareholder-employees
Compensation starts with the work you do.
An S corporation must address reasonable compensation for services provided by a shareholder-employee before making non-wage distributions to that person. Wages generally carry employment taxes; distributions have different tax treatment. Calling a payment a distribution does not change what it actually represents.
The IRS can reclassify non-wage payments as wages when they represent compensation for services. Mraz Tax Solutions LLC helps you document a salary approach using your duties, time, experience, and relevant market data, then connect that work with your S corporation tax preparation and planning.
More than a job title
Reflect every role you perform.
An architect may design projects, manage a team, market the firm, and handle administration. The compensation analysis should reflect that mix of work, not just billable hours or a percentage of profit.
Client Delivery
Technical work, professional services, sales, and the activities that directly generate revenue.
Leadership & Management
Supervising employees, setting budgets, managing projects, and making operating decisions.
Operations & Administration
Scheduling, bookkeeping, marketing, purchasing, and the work that keeps the business running.
The review also considers business circumstances, payments to other employees, compensation agreements, and the source of company revenue. There is no universal IRS-approved “60/40” salary/distribution rule.
Our reporting process
From day-to-day work to a written report.
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Your work
Map your roles and time
We discuss duties, training, experience, hours, and how the business earns revenue. An owner’s work often spans several roles, so the review goes beyond a job title.
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Our analysis
Compare relevant wage data
We benchmark the work against relevant compensation data and consider geography, responsibilities, and time allocation. A composite analysis can reflect the mix of services you perform.
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Your report
Review the written rationale
We document the analysis, assumptions, and compensation conclusion for your records. We explain how it connects to payroll decisions and when changing circumstances warrant another review.
Useful items for your review
Bring a description of your duties and time commitment, business financials, ownership details, and payroll and distribution records. Tell us what changed in your role or the business during the year.
Keep the analysis relevant
New responsibilities, a different schedule, additional staff, or changed business conditions can make an old salary analysis less useful. We can review compensation alongside your broader tax planning and advisory needs.
Questions & answers
Frequently Asked Questions
A useful report explains the facts behind owner pay. Here are the questions we hear most often from S corporation owners.
Request a free initial consultation What is reasonable compensation, and why does it matter?
It is compensation for the services a shareholder-employee performs for an S corporation, based on the facts and circumstances. The IRS requires reasonable compensation for those services before non-wage distributions to the shareholder-employee and can reclassify payments that should have been wages.
How is reasonable compensation determined?
Relevant factors include training, experience, duties, responsibilities, time and effort, comparable wages, business circumstances, and the source of revenue. There is no single IRS-approved percentage of profit or universal salary/distribution split.
Can I pay myself only through distributions?
Non-wage distributions cannot replace reasonable compensation for services you perform as a shareholder-employee. A passive shareholder who performs no services presents a different situation. We review actual duties and direct or indirect payments rather than assuming every owner has the same payroll obligations.
What happens if I pay myself too little?
The IRS may reclassify non-wage payments as wages and assess employment taxes, penalties, and interest. Keeping a supported analysis and accurate payroll records helps explain the approach taken, but the IRS can still review the underlying facts.
What does your reporting service include?
We assess the work you perform, compare relevant compensation data, analyze the mix of roles and time, and prepare a written compensation rationale for your records. We explain the conclusion and how it connects with your tax and payroll decisions.
Is a compensation report an IRS approval or a required filing?
No. The requirement is to pay reasonable compensation under the applicable rules, not to purchase a particular report. A written report documents your analysis; it is not an IRS approval, does not replace payroll filings, and does not guarantee an audit outcome.
When should I update my compensation analysis?
Review it when duties, working hours, staffing, market pay, or business circumstances change materially. We can discuss compensation as part of your tax planning and determine whether a new analysis would be useful.
Business Tax Services
Connect Compensation with Your Tax Plan
Get in Touch
Have any questions?
Let's talk.
Request a free initial consultation to discuss your situation, service scope, and pricing. We will contact you to arrange a call. Specific tax advice and ongoing planning are provided under the terms of an engagement.
Office visits are by appointment. We accept tax-document drop-offs after a signed engagement agreement and by prior arrangement. Please request an appointment before visiting.
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