S-Corp Reasonable Compensation in 2025 — Benchmarks, Factors & a Simple Calculator

Nov 11

The Reality in 2025

Imagine opening an IRS letter: the agent questions your S-Corp salary. You're paying yourself $30k and taking $180k in distributions; industry data suggests your role commands materially more. With approximately 5.9 million S-Corp returns filed in FY2023, reasonable compensation remains one of the most common S-Corp exam issues—now assisted by analytics-driven selection.

Good news: When you calculate and document a defensible number, you can legitimately minimize employment taxes and sleep well.

What "Reasonable Compensation" Means

The IRS standard is straightforward: pay what like enterprises would pay for like services under like circumstances (Treas. Reg. §1.162-7(b)(3)). For S-Corps, shareholder-employees must take reasonable W-2 wages before distributions.

2025 Payroll Facts You'll Actually Use

Social Security wage base: $176,100 → 6.2% OASDI applies up to that cap for both employer and employee.
Medicare: 1.45% each on all wages; additional 0.9% over $200k (single) / $250k (MFJ).

Myth check: There’s no IRS-approved “60/40” rule or any percentage safe harbor. Each case is facts-and-circumstances.

The Cautionary Tale: Watson v. United States

A CPA with 20+ years’ experience paid himself $24,000 while taking $200k+ in distributions. The IRS expert pegged reasonable wages at $91,044; courts sided with the IRS. Don’t be Watson—pay and document a defensible number.

The 9-Factor Test (Your Audit-Defense Checklist)

Education and experience
Duties and responsibilities
Time and effort devoted
Size and complexity of business
Comparison to non-owner employees
Economic conditions
Salary vs. distributions ratio
Market comparables
Company policy and history

Pro tip: Agents look at who generates receipts—owner, staff, or capital. Full-time revenue generation lifts the wage floor.

Two Practical Methods That Work

1. Cost Approach

Add up what you'd pay to replace yourself:

Example: Solo CPA doing tax/advisory

Tax manager (1,200 billable hrs)$75,000

Controller/CFO duties (400 hrs)$30,000

Business development/marketing$20,000

Admin/office management$15,000

Replacement cost total = $140,000

2. Market Approach

Use BLS OEWS data for your metro area. Richmond medians (May 2024) include:

Occupation (SOC Code)	Median Annual Wage	Mean Annual Wage
Accountants and Auditors (13-2011)	$81,630	$90,030
Financial Managers (11-3031)	$149,950	$169,590
General/Operations Managers (11-1021)	$130,890	$156,950
Property/Real-Estate Managers (11-9141)	$66,700	$84,700

Source: BLS OEWS, Richmond VA Metro, May 2024

Blended approach: If you wear multiple hats, allocate hours to each role and weight accordingly.

Real-World Scenarios (2025 Guidelines)

Owner-CPA/Consultant (Full-Time)

Start at $90k–$140k depending on revenue/complexity.

Active Landlord/Property Operator

Tie the service portion to property-manager medians, scaled to actual duties; document hours and responsibilities.

Your 2025 Documentation Kit

Board resolution approving salary & rationale
One-page memo (method, BLS tables, 9-factor notes)
Job description + time allocation
Payroll discipline (regular pay, timely filings)

Avoid These Audit Magnets

Low or no wages + large distributions
Owner paid below senior staff
Percentage rules with no market support
“We’ll set salary after we see profit.” Use contemporaneous approvals.

Quick QBI Reminder (2025)

Set reasonable wages first, then calculate QBI. Below thresholds, the 20% deduction applies broadly; above, SSTB limits phase in/out.

Note: QBI planning never justifies an unreasonably low wage.

Bottom Line

      Pick a recognized method (Cost or Market), ground it in BLS data, apply the 9-factor test, and document.
Pay through proper payroll, on a schedule.
Review annually and update your memo and minutes.

    