Reasonable salary for an S corp: the method, the IRS factors, and a calculator that documents it

By Jonathan Solomon, Founder of LucaLedger. Last updated September 2026. The factors are the IRS's own list, linked at the bottom.

The short answer A reasonable salary is what the corporation would have to pay someone else to do the work you do for it. Build it from the work: each role you fill, the market wage for that role, and the share of your time it takes; then check it against what the business can pay and against the distributions you take. Write down the sources. The IRS can reclassify distributions as wages when the salary does not reflect the work, and it does so most often when officer compensation is zero next to large distributions.

The nine factors the IRS lists

Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation

None is decisive on its own. The method below turns the first three and the seventh into a number, and the calculator records the rest as notes so the file answers the examiner's questions before they are asked.

Calculator

Enter at least one role with market pay and a share of time.

How the method works

Split the work into roles. An owner who consults, sells and keeps the books is doing three jobs. Each has a market wage, and the consultant's wage does not apply to the bookkeeping hours.
Price each role at market. Use the Bureau of Labor Statistics occupational wage tables for your area and your experience level, then adjust for what comparable businesses actually pay. Record the source and date.
Weight by time. Multiply each wage by the share of your time that role takes; add them up. Scale for a part-time owner by hours worked against a 40-hour week; do not scale up for overtime, since market wages already assume full time.
Check it against the business. The corporation cannot pay a salary it does not earn. If the computed salary exceeds the profit, the salary is the profit, and distributions should be nil. If distributions would be large next to a low salary, revisit the shares and the wages: that ratio is what gets reclassified.
Document it. Roles, wages, sources, hours and the date, in the corporate minutes or the tax file, refreshed each year. The calculator prints this as a paragraph you can paste.

Common mistakes

Zero salary with distributions. The pattern in most reclassification cases. Any owner who works for the corporation and takes money out needs wages.
A percentage rule. Sixty-forty is a rumor, not a rule. Two owners with the same profit and different jobs have different reasonable salaries.
Pricing the owner as CEO of a large company. Comparable means a business of similar size in a similar market. The wage for running a five-person practice is not the wage for running a public company.
Forgetting the year changed. Roles shift as a business grows and hires; a salary set three years ago may be wrong in both directions.

Frequently asked questions

How do I calculate a reasonable salary for my S corp?

List the jobs you actually do for the corporation, find what each job pays in your area for someone with your experience, weight each by the share of your working time it takes, and scale for hours worked. That figure, adjusted for what the business can afford and documented with the sources, is the salary. The calculator below does the arithmetic and prints the documentation.

Is there a rule like 60/40 or 50/50 for S corp salary?

No. The IRS has never published a ratio, and the court cases turn on the facts: what the owner did, what it would cost to hire someone to do it, and what the business could pay. A ratio that ignores the work is exactly what an examiner challenges. Use the work-based method and keep the evidence.

What happens if the salary is too low?

The IRS has authority to reclassify distributions as wages subject to employment taxes. The corporation then owes the payroll taxes it avoided, with penalties and interest, and the officer's return may be adjusted too. Zero officer compensation with substantial distributions is the pattern most often reclassified.

Where do I find market wages?

The Bureau of Labor Statistics Occupational Employment and Wage Statistics tables give median and percentile wages by occupation and metropolitan area, free. Job postings and industry surveys add color. Record the source, the occupation code and the date in the file.

Can the salary be lower in a bad year?

Yes, if the business cannot pay it. Reasonable compensation is bounded by what the corporation can afford, and a year with little profit supports a lower salary, provided distributions are low too. A low salary next to large distributions is the combination that fails.

Sources

IRS, S corporation compensation and medical insurance issues (page last reviewed March 3, 2026): the nine factors and the authority to reclassify distributions as wages.
Rev. Rul. 74-44: distributions to shareholder-employees in lieu of reasonable compensation are wages.
Bureau of Labor Statistics, Occupational Employment and Wage Statistics: market wages by occupation and area.

General information, not tax advice. The calculator is a documentation aid; the salary is a judgment on the facts of the business, and your accountant should sign off on it.