Reasonable Salary - S-Corp

General Q & A
1

I am the sole owner of an architecture services business currently operating under a single member LLC. My company typically has net income of $75K-$100K. I have been listening to your advice around electing to file as an S-Corp and becoming an employee of my company with a fair and reasonable wage. I understand this will allow me to save on the 15%+ of self employment tax on delta between my “wage” and the total earnings of the Company. My question is - given I’m the only “employee” in my company and the revenue is entirely based upon design services I render - is it a reasonable stance to say that my W-2 wage would only be 40%-50% of the company earnings? Are the rules different if revenue is all service based and there are no other employees in the company?

Many thanks.

2

What’s reasonable is an undefined concept, unlike other ideas like fair market value. The IRS won’t argue the exact amount of reasonable salary, given the variability of factors that could impact the figure.

The key issue is there are some unscrupulous S-Corp owners who don’t take any officer wages. Clearly, not taking an officer salary is unreasonable. So that is a red flag to the IRS and an easy argument for them to win.