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Pick an industry to begin
The calculator will compute your reasonable compensation range and audit risk as you fill in the inputs.
⚖️ Legal framework — what the courts say
Watson v. United States, 668 F.3d 1008 (8th Cir. 2012)
CPA paid himself $24K W-2 while taking $175K in distributions from his accounting firm. IRS reclassified additional $67,044 as wages. Eighth Circuit affirmed, holding the comp was unreasonably low for the services rendered. This is the foundational case — its reasoning is cited in nearly every reasonable comp audit since.
JD & Associates Ltd. v. United States, 2006-1 USTC ¶50,290
Accounting firm paid CPA owner $19K-$30K while distributing $47K-$87K. Court reclassified $48K, $51K, and $48K as wages across three years. Notable: court explicitly considered owner's experience, training, duties performed, time devoted to business, dividend history, and comparable salaries.
Rev. Rul. 59-60 (factors the IRS uses)
The seminal IRS guidance on valuation. Adapted to reasonable comp context, the factors are: (1) nature and history of the business, (2) economic outlook, (3) book value and financial condition, (4) earning capacity, (5) dividend-paying capacity, (6) goodwill, (7) prior sales of stock, (8) market price of stocks of similar entities. Document these factors in your file.
Treasury Reg. §31.3121(d)-1(c)(2) — Officer-Employee status
"Generally, an officer of a corporation is an employee of the corporation." This is what allows the IRS to require W-2 wages for shareholder-officers in the first place. An S-Corp officer who performs more than minor services cannot escape employee status by labeling all comp as distributions.
⚠️ How to read this output
The wage benchmarks used here are approximate 2024 U.S. Bureau of Labor Statistics median annual wages for the listed occupations (May 2024 OEWS estimates). Geographic and experience multipliers are heuristic ranges based on cost-of-labor variation across states. This calculator produces a defensible starting point — not a substitute for a formal reasonable compensation analysis from a professional valuation firm or compensation consultant when stakes are high (large distributions, multiple owners, complex business, or an active IRS audit). For high-stakes situations, services like RCReports, Paychex Reasonable Comp, or a credentialed business appraiser can produce a fully-documented report. For most small S-Corps, this calculator's range — combined with documenting the inputs you used — is a reasonable defense posture. Always document your reasoning in writing (board minutes, comp memo to file).