2026 tax year · S-corp reasonable comp
Reasonable compensation calculator
An S-corp salary set too low against profit is one of the IRS's favorite audit triggers. Score your risk before you file. And see the salary range that would defuse it.
An S-corp owner-employee must pay themselves a reasonable salary roughly what you would pay someone else to do your job, before taking the rest as distributions. Pay too little and take large distributions, and the IRS can reclassify those distributions as wages, with back payroll tax, penalties and interest. This tool scores how exposed your split looks.
Enter your profit and salary to score your reasonable-comp audit risk.
Why the salary split is watched so closely
Distributions escape the 15.3% payroll tax that wages carry, so a $0 salary is tempting. And exactly what the IRS looks for. In Watson v. Commissioner (8th Cir. 2012) an accountant paid himself $24,000 on over $200,000 of profit; the court let the IRS reclassify $175,000 of distributions as wages. The lesson is not "distributions are bad"it is that the salary underneath them has to be defensible.
Worked example
A consulting S-corp with $200,000 of profit, owner working full-time:
| Salary paid | Ratio | Risk score | Payroll tax the IRS could reclaim |
|---|---|---|---|
| $40,000 (Watson-style) | 20% | 70/100 · High | $9,180 |
| $100,000 (benchmark target) | 50% | 25/100 · Low | $0 |
A $40,000 salary, 20% of profit, scores 70/100 (high risk): well below the 35-65% consulting benchmark, and if reclassified up to the $100,000 target it exposes about $9,180 of payroll tax. Paying the $100,000 target instead scores 25/100 and takes the trigger off the table.
Questions
How does the IRS decide what is reasonable?
There is no fixed percentage. The IRS weighs your role and duties, hours worked, training and experience, what comparable businesses pay for the same work, the company's size and what it can afford, and how much of the profit comes from your labor versus from capital or other employees.
Can I pay myself nothing if the business lost money?
Yes. The reasonable-compensation rule bites only when there is profit that could have been distributed. No profit, no required salary. If you have profit but reinvest all of it, the IRS may still argue for a salary, though reinvestment can be part of a reasonable-cause defense.
What happens if my salary is found too low?
The IRS reclassifies distributions as wages and assesses the 15.3% employer-plus-employee FICA on the reclassified amount, plus penalties for late payroll deposits and interest. The tax is on the shortfall between what you paid and a reasonable salary, which is why the benchmark range matters.
Should I get a formal reasonable-compensation study?
If your salary is well below benchmark, say under 30% of profit, yes. A formal study documents comparable wage data for your role, geography and industry, and is your strongest defense in an audit. The score here is a screen, not a substitute for one.
Related tools
- S-corp tax calculator the salary-vs-distribution savings
- S-corp salary calculator set the reasonable figure
- Entity tax calculator whether an S-corp is right at all
The benchmark ranges are practitioner rules of thumb informed by BLS wage data and the reasonable-comp court cases, not official IRS figures. This is a risk screen, not a compensation study or tax advice.