Reasonable Compensation for an S Corporation Officer

According to Form 1120S United States Income Tax Return for an S Corporation, individuals paying an officer of that corporation must do so through a salary. As such, the IRS states that the salary amount should be considered reasonable compensation. While the tax code itself does not outline what reasonable is defined as, the US's regional courts have created some guidelines for S Corporations to follow in this regard.

Numerous factors may play a role in determining what reasonable compensation is. While it still is left up to the discretion of the S Corporation, the following are some guidelines to use, according to various courts.

• The training and experience of the officer

• The responsibilities and duties of the officer

• The dividend history of the S Corporation

• The amount of time and effort devoted to the business by the officer

• Compensation agreements put forth

• Payments to non-shareholder employees

• Comparable wages from other similar S Corporations

• A formula developed to help determine what the officer should receive as compensation

• The timing and the manner of bonuses paid out to key people within the S Corporation

Keep in mind the following statement from the IRS regarding compensation given to an S Corporation officer. "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation." While this still leaves some room open for the discretion of the corporation, it also places potential limitations on what is considered reasonable.