Reasonable Compensation Report for S Corporations and IRS Audit

What is the S-Corp Reasonable Compensation Report?

The S-Corp Reasonable Compensation Report gives a faultless position to an IRS challenge, and is an amazing planning and valuation instrument. Upon buy you will get a link to finish an overview for your business. The report will be custom fitted to your business through appropriate responses you give in the review.

Quit speculating! Try not to get discovered utilizing the wrong pay data.




We understand the different challenges small business owners face in their day-to-day operations. Whether it’s a start-up company or small businesses that have been in operation for years, our team can help you dedicate your time to your business and letting us manage all accounting related functions.

Topics We Will Cover in Your Report

The S-Corp Reasonable Compensation Report synthesizes a proprietary blend of IRS criteria, Court Rulings, geographic data and a database of wages to accurately assess Reasonable Compensation for S-Corp and Small Business Owners. Following are the covered topics:

Your Money

A financial summary of your business and compensation

Your Business

A summary of your business as it is relevant to the report

Your Time

Time sheets, time invested, and dedications breakdown


A summary of our methodology and guidelines for the report


Calculations and predictions with research and your business


Elements that must be taken into account in determining pay

At Akif CPA we take the time to understand our clients and their unique industry because we believe that is the foundation of our work which yields in long-term profitability and successful future business planning 

I have worked with Akif for many years and he has been my accountant and tax professional for the past 3 years. His staff takes a very personal approach to their assistance with your needs – I don’t know what I would do without them. I highly recommend their services – it is so wonderful to know that your accounting and tax needs are in good hands!

Judy Pabor - Hudson Blankenship

IRS Audit of Reasonable Compensation of S-Corporation

An S corporation is a type of pass through entity and a way to structure your business if you want a simplified tax structure. In addition, shareholders generally prefer business dividends to be distributed as supposed to being paid as compensation as then the amount becomes a tax liability. To prevent shareholders from evading tax payments by maximizing dividend distribution, the IRS introduced “Reasonable Compensation”. This is an appropriate amount paid to the shareholders as compensation for the services rendered by them towards the business. Challenges have arisen out of this structure as it is unclear what counts as a “reasonable” amount. If the amount paid is low, the IRS is bound to have a problem with it. If the amount paid is high, then social security and Medicaid taxes end of eating a substantial portion of that amount. This puts financial tax advisors and planners in a tricky position when it comes to being consulted on this.

Court challenges including one in the supreme court since 2010 have revealed the IRS methodology behind setting this compensation. First, the compensation is determined not by the business profits but rather, by the amount allocated by the shareholder for distribution. Secondly, to defend oneself on IRS challenges regarding the amount being paid, it is best to document compensation setting in the business on an annual basis.

5 Things to Keep in Mind While Paying Out Reasonable Compensation

Pointer #1: Using IRS Report Values as Baseline

It is important to identify the average pay by the industry of your interest to its corporate officers and use that as the baseline to pay shareholders the compensation. With IRS auditing, its always safe to assume the corporate officer pay is a fair estimate of compensation for your business. For example, if average pay to corporate officers is $30,000, then that should be your baseline compensation pay.

Pointer #2: Bureau of Labor Statistics (BLS)

While IRS industry reports help you ball park your estimate, one of the ways to arrive at a more accurate pay estimate is referring to the BLS reports. As a job specific report, it gives you more realistic pay values as compared to third party sources and moreover, it is also trusted by the IRS as it is a federal source of information.

Pointer #3: Owner Equivalence

As an S corporation owner, it is safe to assume that your pay would be higher than that of the employee. So, business owners must state a pay higher than that of their employees.

Pointer #4: Compensation as Fringe Benefits

A popular method to reduce distributions, and increase the reported compensation is to make up compensation amounts with non-taxable fringe benefits. An example of this would be health insurance. Let us say that the profit to go to a shareholder employee is $150,000. If $70,000 went as compensation pay and the remaining for distribution, that would be unbalanced and raise red flags. In such a case, spending a chunk of the remaining $80,000 for something like employee health insurance would reduce the distributable amount and reinforce your compensation pay. Additionally, when calculated properly, the health insurance would be non-taxable thus saving you from extra liability.

Pointer #5: Minimizing Your Distribution

Assuming the worst happens and the IRS decides your compensation pay is not reasonable, this would mean your distribution would be reallocated as income. To ensure you do not loose your distribution amount to taxes, one can either leave their amounts within the corporation or register amounts as charities instead of categorizing them as distributions which may then be lost if the IRS decides to act.

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