What is reasonable compensation and why should I care?
If you are an S Corporation owner, you must pay yourself a W2 income and pay FICA taxes.
The IRS mandates that S Corporation owners must pay shareholder-employees in return for their services.
Unfortunately, many S Corporations owners went overboard and did not pay any wages. The IRS Inspector General found that in 2,000 about 440,000 single shareholder S Corporations paid no salary to themselves, which resulted in lost taxes to the IRS, so they stepped up either enforcement. This means more IRS Audits of S Corporations.
If your salary is to low, you could be subject to an IRS audit.
If your salary is too high, you are over paying FICA taxes each year.
As your tax advisors, we can help you come up with the appropriate salary to pay yourself.