1. What is an S-Corp Reasonable Salary Calculator?

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

Purpose: It helps S-Corp owners determine an appropriate salary that meets IRS requirements while optimizing tax benefits.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

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

Explanation: The company revenue is multiplied by an industry-specific factor to determine a salary that would be considered reasonable by the IRS.

3. Importance of Reasonable Salary Calculation

Details: S-Corp owners must pay themselves reasonable compensation for services performed before taking distributions. This prevents tax avoidance by disguising salary as distributions.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What is a reasonable industry factor (k)?
A: Typical factors range from 0.2 to 0.4 (20-40%) depending on industry. Service businesses often use 0.3-0.4, while product businesses may use 0.2-0.3.

Q2: Why is reasonable salary important for S-Corps?
A: The IRS requires S-Corp owner-employees to pay themselves reasonable compensation to prevent avoiding payroll taxes on distributions.

Q3: What happens if I don't pay a reasonable salary?
A: The IRS may reclassify distributions as wages, subjecting them to payroll taxes and potentially imposing penalties.

Q4: Are there other methods to determine reasonable salary?
A: Yes, you can also use comparable wages for similar positions, third-party salary surveys, or the 60/40 rule (60% salary, 40% distribution).

Q5: Should I consult a tax professional?
A: Yes, this calculator provides estimates only. Always consult a tax professional for your specific situation.