What is Reasonable compensation (S corporations)?
In short
S corporation shareholder-employees must be paid reasonable compensation for their services before taking distributions. Wages are subject to payroll taxes, while distributions are not.
Key takeaways
- The Internal Revenue Service can recharacterize distributions as wages if pay is unreasonably low.
- Reasonableness is judged against what similar businesses pay for similar services.
- Higher wages reduce qualified business income but can raise the wage limit on the 20% deduction.
Where it's tested
TCP: S Corporation Compliance & Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
An S corporation shareholder-employee who takes only distributions and no salary risks: