Reasonable Compensation by Owners/Officers is a requirement of the IRS and may not be less than any distribution made to those shareholders who are substantially involved in the operations of the business. In fact, should distributions be greater than wages, the IRS MAY red flag the 1120-S for audit consideration.
Reasonable compensation requires several considerations:
- the market rate for colleagues working in the same capacity or performing the same tasks of the Officer/Employee
- time performing those tasks necessary to complete the tasks
- education or experience required for the duties performed
- is the wage earned by the officer/employee comparable to that paid to another hired for the same position from outside the company
- can the company's profits sustain the employee's wage
Reasonable compensation is payroll paid to the officer/employee through payroll on a W2. It is never paid through 1099-NEC nor through distributions.
The reason for the IRS ruling and change is to require corporate officers and owners to pay their fair share of Social Security taxes, which were being underpaid or neglected through distributive withdrawals. This change now requires Owners to remember they are employees of their own company and must pay themselves as such. https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...
Business Meals - Whether meals are business related, not lavish, and part of its ordinary and necessary course of business, meals, as of 2023, are only 50% deductible to a company. Deductions of 100% are no longer available to the business person or company, no matter the reason for meal, whether taking a client to lunch, dinner or while on a business trip. https://www.irs.gov/publications/p463#en_US_2023_publink100033783
