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:
š Training and experience
š Duties and responsibilities
š Time and effort devoted to the business
š Dividend history
š Payments to non-shareholder employees
š Timing and manner of paying bonuses to key people
š What comparable businesses pay for similar services
š Compensation agreements
š The use of a formula to determine compensation
