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S-Corp Salary Mistakes That Trigger Audits
S-Corp Salary Mistakes That Trigger Audits
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.
