Reasonable Compensation for S-Corp Owners

A clear, IRS-aligned primer to help you understand expectations and why documentation matters.

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Reasonable Compensation in a Nutshell

  • 1. S Corp shareholder employees must pay themselves reasonable wages via W-2 before taking distributions
  • 2. Reasonable compensation should be reviewed and documented each year
  • 3. Inadequate documetation increases audit risk and potential penalties

The full guide explains how each of these applies to your specific business — and where owners most often make costly mistakes.

What Happens If You Get This Wrong?

  • Back taxes, penalties, and interest assessed by the IRS
  • Increased audit risk
  • Distributions reclassified as wages
  • Potential loss of S-Corp tax benefits

This is why reasonable compensation isn’t something to guess at.  The guide explains how to determine a defensible compensation amount.