Can your S-corp compensation file explain the number?
Build a contemporaneous file that connects the owner's work, market evidence, payroll, and non-wage distributions.
What's inside
- The IRS rule requiring reasonable compensation before non-wage distributions
- A seven-question evidence review covering duties, hours, experience, and comparable pay
- A worksheet connecting gross receipts, owner services, payroll, and distributions
- A year-end file checklist, including shareholder health insurance and basis records
Email me the self-audit.
Reasonable compensation is a facts-and-evidence question.
The IRS can reclassify S corporation distributions as wages when a shareholder-employee performs services but is not paid reasonable compensation. No single salary-to-distribution ratio decides the answer.
A supportable file starts with what the owner actually does, how much time those duties require, what comparable employers pay for similar work, and how the business earns its gross receipts.
This worksheet helps organize that evidence before payroll and the return are finalized. It does not calculate a universal salary or replace advice based on the company's facts.
General educational information reviewed through 2026.08.10. Not tax, legal, payroll, or fact-specific advice. Alex Sears CPA LLC is a Texas-licensed CPA firm.