Alex Sears CPA  -  Katy, TX
(832) 677-0085 Book free consult
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For S-corp owners

Is your reasonable comp
actually reasonable?

7-question self-audit. 12 minutes. Spot the W-2 vs distribution problem before the IRS does.

For S-corp owners doing $80K to $1M in profit. Free PDF.

What's inside

  • Score yourself on 7 specific risk factors (Watson v. Commissioner is the case the IRS cites)
  • The 4 score bands and what each one means for your audit exposure
  • How to fix the W-2 ratio in Q4 without a one-shot December panic payroll
  • Form 7203 basis schedule walkthrough most owners get wrong
  • Why your S-corp health insurance only deducts if it runs through Box 1

Send me the PDF.

No newsletter spam. You get the PDF link, plus an honest follow-up note from me if your answers suggest a Q4 fix is on the table. Unsubscribe in one click.

Why this matters.

The IRS has been training auditors on S-corp reasonable comp since 2005. The case they cite is Watson v. Commissioner: an accountant took a $24,000 salary on $200,000 of S-corp profit. The court reclassified $67,000 of his distributions as wages. Plus payroll tax. Plus penalty. Plus interest. The number on the original return wasn't even close.

You don't have to be doing $200K to land in the audit screening band. The IRS Office of Research uses computer modeling on S-corp returns. Two ratios drive most flags: owner W-2 as a % of gross profit, and owner W-2 as a % of total owner distributions. If you took $0 in W-2 and $80K+ in distributions in a year the business cleared $120K+, you're flagged.

The fix has a deadline. Reasonable comp is judged at year-end. You can still spread a corrective W-2 across remaining Q4 payroll cycles. After Dec 31 your only option is one giant year-end check, which the IRS reads as exactly what it is: a panic fix.

The self-audit is a 7-question screen. Score yourself, read the interpretation, and on the last page there are three concrete next moves depending on what band you land in.

General information for S-corp owners. Not tax advice for your specific situation. Reasonable compensation determinations depend on your specific facts, industry, and historical compensation patterns. Talk to a CPA who has seen your books before acting on this. Alex Sears, CPA is licensed in Texas.