Determining fair compensation for shareholder-employees within an S corporation framework is a crucial task. Tools designed to aid in this process consider factors such as industry benchmarks, experience, and contributions to the business. For instance, an individual with extensive experience managing a construction firm structured as an S corporation would likely command a higher salary than someone with limited experience in a similar role.
Establishing appropriate salary levels offers several key advantages. It ensures compliance with IRS regulations, potentially avoiding penalties associated with misclassifying distributions as salary or vice versa. Historically, disagreements over reasonable compensation have been a source of contention between the IRS and S corporations. Utilizing resources that guide salary determination allows for more accurate payroll tax calculations and strengthens the defense against potential audits.
