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Why is reasonable compensation important for S Corporation shareholders?
PostedNovember 17, 2025
UpdatedNovember 17, 2025
ByKlemens Raab
It prevents S Corporation owners from avoiding payroll taxes by paying themselves little or no salary while taking large \”distributions\” instead. The IRS, supported by court decisions, requires shareholder-employees to pay themselves a fair salary for the work they perform before taking distributions.
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Reasonable Compensation
- What is reasonable compensation according to the IRS?
- Why is reasonable compensation important for S Corporation shareholders?
- What happens if an S Corp owner takes distributions but no reasonable compensation?
- What is the main advantage of distributions over wages for S Corp owners?
- What are the major decisions in the Reasonable Compensation area and the lessons learned from them?
- What tool can be used to calculate reasonable compensation more easily today?
- What document did the IRS release to help examiners determine reasonable compensation?
- What are the three approaches outlined in the IRS Job Aid?
- What is the cost approach for determining reasonable compensation?
- What is the market approach for determining reasonable compensation?
- What is the income approach for determining reasonable compensation?
- What happens if an S Corp pays a shareholder via 1099 instead of W-2?
- What authority does the IRS rely on to reclassify payments as wages?
- Can distributions exceed reasonable compensation?
- Does the IRS penalize preparers for improper reasonable compensation reporting?
- What is the importance of Form 1125-E?
- Can wages be declared in Q4 if missed earlier in the year?
- What case emphasized the importance of documenting officer roles?
- What is one red flag for an IRS audit on S Corps?
- What was the outcome of the Glass Blocks case?
- What factor is not considered in reasonable compensation determinations?
- What should be considered in a compensation agreement?
- Can an S Corp pay less than the fair value of services provided?
- What is the risk in issuing distributions before paying reasonable compensation?
- Who bears the burden of proving reasonable compensation is appropriate?
- What is one common mistake S Corp owners make?
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