How to Set Your S-Corp Reasonable Salary
The IRS has a position. Your accountant has a position. You need to know both. The S-corp reasonable salary is hard not because the rule is complicated, but because it is fuzzy and the incentive to break it is large. The IRS…
The IRS has a position. Your accountant has a position. You need to know both.
The S-corp reasonable salary is hard not because the rule is complicated, but because it is fuzzy and the incentive to break it is large. The IRS does not publish a formula; they publish a framework. Here is how to set a number that is defensible.
Identify the primary work you actually do, not your title.
Are you the electrician who owns the electrical company, or the operator who manages crews? Most owners are a mix. Estimate the percentage of your time on the trade versus on running the business. This split is the backbone of the whole calculation.
Pull market salary data for that work in your area.
Bureau of Labor Statistics Occupational Employment and Wage Statistics (bls.gov/oes), which publishes wages by occupation for metro areas, is the standard source. Salary.com and Glassdoor are secondary. Get three data points for the trade rate and three for the management rate.
Adjust for your experience, then blend the two rates.
Fifteen years in the trade moves you toward the top of the range; two years stays near the bottom. Calculate: (percent of time on trade × trade rate) + (percent of time on management × management rate). That blended number is your anchor.
Sanity-check against the business and the IRS factor list.
The salary should be a meaningful portion of what the business produced, not a token. The IRS looks at nine factors including training, duties, dividend history, comparable pay, and whether you have a written compensation agreement. Your number should be defensible on every one.
Document the methodology in a one-page memo to your file.
Date it. Keep it. "That is what my accountant told me to pay" is not a defense. "BLS OES data for a licensed electrician in my metro, blended 70/30 trade/management, adjusted for fifteen years of experience" is a defense. Revisit the number every year.
The nine factors, in the IRS's own words
The IRS lists the factors courts have used to decide whether pay is reasonable: training and experience; duties and responsibilities; time and effort devoted to the business; dividend history; payments to non-shareholder employees; timing and manner of paying bonuses to key people; what comparable businesses pay for similar services; compensation agreements; and the use of a formula to determine compensation (IRS, S Corporation Compensation and Medical Insurance Issues). The same page states the downside: the IRS can reclassify distributions to a shareholder as wages, which are subject to employment taxes. Put a sentence for each factor in your memo.
What the salary actually costs
Wages carry Social Security tax of 6.2% from the employer and 6.2% from the employee, plus Medicare tax of 1.45% from each, and an extra 0.9% Medicare tax is withheld on wages over $200,000 (IRS Topic 751). The Social Security part stops at the wage base, which is $184,500 for 2026 (Social Security Administration, automatic adjustments). Budget for both halves: the corporation pays the employer share on top of the salary.
Key figures
| IRS GUIDANCE | No set figure | pay what the services are worth, judged on factors such as training and experience, duties, time devoted, and what comparable businesses pay (IRS, S corporation compensation) |
|---|---|---|
| PAYROLL TAX | 15.3% | up to SS wage base; +2.9% Medicare |
| IRS FACTORS | 9 | reasonable-comp evaluation framework |
The S-corp reasonable salary is hard not because the rule is complicated, but because it is fuzzy and the incentive to break it is large. The IRS does not publish a formula; they publish a framework. Here is how to set a number that is defensible.
— The one-sentence answer
Before you test the salary against what the business can support, it helps to know your real profit margin. Isabella's other guides for owners, from bookkeeping to compliance, are listed on her contributor page.