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Reasonable Compensation For Your S Corp
Reasonable Compensation For Your S Corp

A general overview of reasonable compensation

Updated over a week ago

How To

At Collective, we provide an initial range based on the data you provided when you joined as a member. This range is meant to serve as a starting point but is not a recommendation and we advise you to conduct your own additional research to determine a reasonable compensation number that’s appropriate for you.

After reading the rest of this Help article, be sure to check out our Blog on S Corp Salary.


S Corps are a type of business entity that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. As an S Corp shareholder, you will be required to take reasonable compensation, which is subject to employment taxes and should be included as wages on your W-2 form.

Facts and Circumstances Test

When determining your reasonable compensation for you as an employee of your S Corp, it's important to understand that the IRS imposes a facts and circumstances test to evaluate whether the compensation is “reasonable”. While there are several factors that are helpful to keep in mind, no single factor is determinative.

Market Rate

One factor to consider is the industry and market rate for similar positions. You can research industry data and salary surveys to get a sense of what other businesses in your area are paying for similar roles. This can give you a benchmark for determining a range for what would be considered reasonable compensation for your position.

Business Size and Profitability

Another important factor to consider is the size and profitability of your business. Your compensation should be proportionate to the size and financial performance of your business. If your business is not profitable, it may not be reasonable to pay yourself a high salary. Conversely, if your business is profitable, it may be reasonable to pay yourself a higher salary. Additionally, in the case your company is not profitable, it's important to be mindful of the income and expenses reported, so it doesn't raise any red flag with the IRS.


Finally, it's important to be consistent in determining and reporting your salary. It is not advisable to change the salary amount year over year significantly, especially without any proper justification. To avoid raising any red flags with the IRS, it is important to have a consistent salary amount and proper documentation to support your decision making.

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