CPA of Denver · Work directly with Philip M. Falco, CPA
Reasonable compensation is a fact-based evaluation of the services an S corporation shareholder performs. A fixed salary/distribution percentage cannot replace that analysis. Owner payroll should be considered before treating payments as non-wage distributions.
What Factors Affect Reasonable Compensation?
The IRS identifies factors such as training, experience, duties, time devoted to the business, comparable compensation and the company’s payment practices. The source of business receipts also matters: services performed by the owner differ from revenue generated by other employees, equipment or capital.
Build a Record of the Work Performed
- Describe the owner’s operational, management and administrative responsibilities.
- Record time devoted to different roles and changes during the year.
- Identify appropriate compensation comparisons and their limitations.
- Reconcile payroll, benefits and distributions to the books.
- Document the assumptions and revisit them when responsibilities change.
Why a Percentage Rule Can Mislead
Consider two businesses with similar profits: one depends entirely on its working owner, while the other earns revenue through employees and equipment. Their compensation analysis may differ even when the bottom-line profit is the same. Neither a low salary chosen to reduce payroll taxes nor an arbitrary percentage establishes a supportable result.
Coordinate Payroll With the Owner’s Tax Picture
A compensation discussion should consider withholding, retirement contributions and relevant shareholder benefits. It should also identify payroll already processed and whether corrections are needed. A planning recommendation does not itself amend payroll filings or resolve a past-year reporting issue.
What to Bring to a CPA Discussion
Bring the prior Form 1120-S, current financial statements, payroll reports, a description of owner duties, distribution records and benefit details. A focused consultation can identify questions and missing information. A formal compensation study, third-party report or payroll correction requires a separate written scope and fee.
See S corporation returns, annual business advisory and S corporation election help.
Frequently Asked Questions
Is a 60/40 salary split an IRS safe harbor?
No. A percentage split does not establish reasonable compensation. Evaluate the actual services and relevant facts.
Does a CPA consultation include a formal salary study?
No. The consultation can address the question within its time allowance. A documented study, external compensation report or corrective payroll work is separately scoped.
Choose Your Next Step
For a focused question, review the $350 CPA Consultation: up to one hour total for document review, preparation and the telephone call. Larger analyses and implementation require a separate engagement. For service-fit and pricing questions, send a brief inquiry; do not include sensitive financial records.
Official References
Updated October 17, 2026 · CPA of Denver. General information; the applicable tax year, facts and written engagement determine the work and advice provided.