As you embark on establishing your S Corp, we understand the complex decisions you face. One of these crucial choices is selecting your own salary. This guide helps demystify this process and help you make an informed and comfortable decision.
Understanding Reasonable Compensation
The IRS acknowledges the tax benefits associated with an S Corp structure, and therefore encourages S Corps owners to compensate themselves appropriately. However, there are no set guidelines provided by the IRS in determining what can be considered as 'fair' compensation. Therefore, the decision regarding fair compensation is completely contingent on individual circumstance and is truly a facts and circumstances test.
Guiding Principles in Salary Selection
At Collective, we follow certain key guiding principles in formulating our salary recommendations. We avoid prescribing an exact salary due to the unique conditions all our members face. Instead, we provide a range for your convenience.
The salary range in your Collective Dashboard is primarily based on a calculation from your expected profit over the next 12 months, in addition to IRS guidance. In an IRS compensation fact sheet, it is mentioned “there are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.”
We recommend researching what similar roles pay based on where you live. It’s also important to consider your total income in comparison to your salary. From there, you can determine the reasonableness of your selection or update given any new information.
As a small business, it would be understandable that a salary at one company might be too large of an expense for your business to pay. Remember to keep your expected profit in mind when making decisions on your compensation and set a salary that aligns with your comfort level.
At the end of the day, you are the business owner, and the final decision regarding your salary is entirely up to you.
Flexibility & Adjustments in Salary Selection
Your salary selection is not a permanent commitment. You can adjust it at any time as your business’s progress and profit margins change. This flexibility comes in handy as favorable changes in your business may call for a deserving upward adjustment. But if things get lean, you can also pause payroll if necessary.
Collective’s Role in Your Salary Selection
Collective is here to be a facilitator as you choose a salary – we do not influence or decide your specific salary. Our intention is to provide a reference range, help set up your payroll and offer impartial guidance in your decision-making process. We are here to empower you with the right information to make the decisions right for you and your business.
Should you need further assistance in your salary selection, please reach out to us. We are here to support you.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.