I'm a shareholder and employee of an S-corp. I provide consulting services to hospitals employed by the S-corp. How do I estimate my reasonable salary?
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What's a Reasonable Salary?
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state
"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."
The amount of the compensation will never exceed the amount received by the
shareholder either directly or indirectly. However, if cash or property or the right to
receive cash and property did go the shareholder, a salary amount must be determined
and the level of salary must be reasonable and appropriate.
There are no specific guidelines for reasonable compensation in the Code or the
Regulations. The various courts that have ruled on this issue have based their
determinations on the facts and circumstances of each case.
Some factors considered by the courts in determining reasonable compensation:
Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation
What's a Reasonable Salary?
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state
"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."
The amount of the compensation will never exceed the amount received by the
shareholder either directly or indirectly. However, if cash or property or the right to
receive cash and property did go the shareholder, a salary amount must be determined
and the level of salary must be reasonable and appropriate.
There are no specific guidelines for reasonable compensation in the Code or the
Regulations. The various courts that have ruled on this issue have based their
determinations on the facts and circumstances of each case.
Some factors considered by the courts in determining reasonable compensation:
Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation
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