Glossary
Reasonable salary (S-corp)
The wage an S-corp must pay its owner-employee before taking distributions, set at what the business would pay someone else for the same work.
The saving from an S-corp comes from distributions escaping self-employment tax. The IRS accepts that only if the owner first takes a salary that is reasonable for the role, hours and location. There is no fixed percentage; the evidence is comparable salaries, the business's own hiring costs and industry surveys. An owner taking $20,000 of salary on $200,000 of profit is the audit case; one taking $80,000 on $150,000 rarely is.
Reclassification means back payroll taxes on the distributions, penalties and interest. Documenting how the salary was set, once, is the whole defence.
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