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As the year comes to a close, many S corporation owners focus on maximizing deductions — but one area that’s often overlooked (and heavily scrutinized by the IRS) is reasonable compensation.
Why It Matters
Your reasonable compensation — the salary you pay yourself as an officer of your S corporation — affects more than just payroll taxes. It determines how much income is subject to Social Security and Medicare, impacts your ability to contribute to retirement plans, and ultimately shapes your overall tax liability.
Paying yourself too little can trigger IRS attention. Paying yourself too much can mean you’re overpaying in payroll taxes. The key is finding the right balance that aligns with IRS guidelines and your business’s financial reality.
How to Calculate It Correctly
Determining what’s “reasonable” isn’t guesswork — the IRS uses specific factors such as your duties, training, experience, time invested, and how similar businesses compensate for comparable roles.
To take the guesswork out of the process, you can sign up to use the Reasonable Compensation Calculator at www.reasonablecompcalc.com.
Our IRS-based tool helps you identify a defensible salary range that fits your business and industry standards.
The Bigger Picture: Salary and Retirement Planning
Your officer salary doesn’t just affect taxes — it also determines how much you can contribute to retirement plans. Without W-2 wages, you may lose the ability to make contributions entirely.
Here are several options to review before December 31:
- Solo 401(k): Offers high contribution limits for owner-only businesses.
- SEP IRA: Simple to administer and ideal for small teams or solo owners.
- SIMPLE IRA: Combines employee deferrals with employer matching.
- Profit Sharing Plan: Allows discretionary employer contributions to boost savings while adding flexibility.
- Defined Benefit Pension Plan (DBPP): Uses actuarial formulas to determine annual contributions based on age, income, and desired retirement benefit — often allowing six-figure deductions for high-income earners looking to “catch up” on savings.
Don’t Wait Until Tax Time
Reviewing your compensation and retirement plan contributions before year-end can unlock significant tax savings and ensure compliance with IRS expectations.
The right salary strategy doesn’t just check a compliance box — it’s a powerful part of your overall tax planning.
Ready to find your ideal compensation range?
Start your calculation today at www.reasonablecompcalc.com
