If you’re a contractor with an S-Corp paying yourself $40K while netting $300K…

You’re on thin ice.

“Reasonable compensation” is the #1 S-Corp audit issue.

The IRS standard is simple:

What would you have to pay someone else to do your job?

If you:• Run operations• Manage crews• Bid jobs• Oversee projects

Your salary must reflect that.

Why the IRS cares:

Salary = payroll taxDistributions = no payroll tax

Underpay salary, and they can:• Reclassify distributions• Assess back payroll taxes• Add penalties and interest

Reasonable comp isn’t:• A round number• What your friend pays himself• Whatever your payroll software runs

It should be based on:• Role• Market data• Profit level• Time worked

Smart S-Corp strategy saves money.Guessing at salary costs far more.

Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.