1. What is S Corp Reasonable Compensation?

Definition: This calculator estimates the reasonable salary for S Corporation shareholder-employees based on company revenue and industry-specific factors.

Purpose: Helps S Corp owners determine appropriate compensation to avoid IRS scrutiny while optimizing tax benefits.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( S \) — Reasonable compensation (USD)
• \( k \) — Industry-specific factor (dimensionless)
• \( R \) — Company revenue (USD)

Explanation: The company revenue is multiplied by an industry-specific factor to estimate reasonable salary for shareholder-employees.

3. Importance of Reasonable Compensation

Details: The IRS requires S Corp shareholder-employees to receive reasonable compensation for services performed before taking distributions. Proper calculation avoids penalties.

4. Using the Calculator

Tips: Enter your company's annual revenue and select an appropriate industry factor (default 0.3 or 30%). All values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical industry factor (k)?
A: Most industries use 30-40%, but this varies. Service businesses typically use higher factors (40-50%) than product businesses (20-30%).

Q2: Why is reasonable compensation important?
A: The IRS requires shareholder-employees to pay employment taxes on reasonable compensation before taking tax-advantaged distributions.

Q3: What factors affect reasonable compensation?
A: Industry standards, individual qualifications, responsibilities, hours worked, and comparable salaries for similar positions.

Q4: Is this calculation definitive for IRS purposes?
A: No, this is an estimation tool. Consult a tax professional for your specific situation and to review IRS guidelines.

Q5: How often should I reassess reasonable compensation?
A: Annually, or whenever your business revenue or job responsibilities change significantly.