there are no hard and fast rules as to what's reasonable. there are numerous court cases and about the only similarity is there is no similarity. What is reasonable differs from case to case because the facts are different.
The IRS has stated the following: “If most of the gross receipts and profits are associated with the shareholder’s personal services, then most of the profit distribution should be allocated as compensation.” So what is “most.” 50% or 90%? As stated the tax court cases differ. Also, the TCJA implemented a deduction (Qualified Business Income Deduction under IRC code section 199A) of up to 20% of qualified business income. For an S-Corp, QBI is the net income (gross income less expenses). To oversimplify if your S_Corp has a net profit of $100,00, only $80,000 of it is taxed. The QBI incentivizes owners to take less salary. Again to oversimplify,
say your 100% and will make $100,000 in profit prior to any W-2 wages paid to you. Say you would take $60,000 as W-2 wages. your taxable income is only $92,000 ($60,000 W-2 plus $32,000 ($40,000 net profit multiplied by 0.8). Now, you take only $20,000 in W-2 wages, leaving $80,000 as QBI, and your taxable income is only $84,000 ($20,000 in W-2 wages plus $64,000 ($80,000 net profit multiplied by 0.8). You and the Corp have saved FICA and Medicare taxes. A downside to taking less salary is that will reduce the maximum retirement plan contribution that can be made. Of course the S-Corp making a retirement plan contribution reduces your taxable income from wages and S-Corp but also reduces net profit which reduces the QBI,
it is unlikely the IRS would ever say you took too much salary but too little has substantial tax consequences. The corp would be subject to paying additional payroll taxes, penalties and interest. Your personal return would be change with the QBI deduction being reduced which means you would be subject to paying additional taxes penalties and interest. Another thing to consider about converting to an S-Corp is what happens if you lose money trading.
not incorporated (schedule C) would give you a QBI deduction of up to 20% of net profit which is schedule c less 1/2 the SE tax less any retirement contribution attributed to the trading less any other directly related expenses.
