S-corps · 8 min · March 12, 2026
Reasonable compensation is not a vibe.
The IRS has a list. Your payroll should be able to point to it.
An S-corporation is a payroll decision wearing an entity costume. The ordinary income on the K-1 avoids FICA. The wage does not. Set the wage at $24,000, take $180,000 of distributions, and you have a notice waiting — not this year, necessarily, but on a year the Service staffs the project.
What ‘reasonable’ means here
The courts look at duties, training, time spent, what comparable businesses pay, and what the company can actually afford. A solo consultant who is the rainmaker, the delivery, and the bookkeeper is not a $40,000 clerk. A practitioner who has two W-2 staff and spends three days a week on the tools is not a $220,000 CEO either.
A method we will put in the file
We pull BLS or a trade survey for the role, haircut it for a Gulf-coast cost of labor, write a one-page memo, and set payroll to that number. Distributions take the rest. The memo is the audit defense. The number without the memo is a guess.
QBI and the wage floor
Specified-service businesses (consulting, law, health, accounting) lose the QBI deduction as taxable income climbs. Wages can both support reasonable compensation and, in some cases, help the W-2/property limitation on non-SSTB companies. These two jobs of the wage are not the same. We run both before we lock payroll for January.
If your wage has not been revisited since the entity election, that is the planning meeting. Bring last year’s K-1 and a description of who does what. We will send the memo before the first January pay run.
This is a note, not advice. Facts change the answer. Book the consult if you want the numbers run on your file.