How a Reasonable Compensation Study is built

This page exists so the work can be checked. It sets out the approaches a Study considers, the public data its wage evidence comes from, what a written rationale has to contain, and where the professional judgment sits. Every regulatory statement below links to the source it rests on.

Get startedSee how a Study is built

What is reasonable compensation?

It is the deduction test written into the compensation regulation: a reasonable allowance for salaries or other compensation, for services actually rendered. For an S-corporation, the IRS applies it to a shareholder-employee who performs services, and expects wages for that work before non-wage distributions. A Reasonable Compensation Study is the workpaper that records what a firm concluded on that question and how.Source: 1Source: 2

Where the wage evidence comes from

A conclusion is only checkable if its inputs are. All three properties below are about the reader being able to reach the same data.

  • Public wage data

    The market comparison rests on the federal occupational wage survey, not on a private dataset a reader cannot open. Anyone reviewing the Study can go to the same table.Source: 4

  • Pinned to a named release

    A Study records which published release its wage evidence came from, so re-opening it next season shows what was true when the conclusion was reached rather than what is true today.Source: 4

  • Traceable at field level

    Traceable at field level means each figure in the workpaper carries its own source, not that the Study cites a source somewhere. Anyone checking the work can verify one number without re-deriving the rest.Source: 4

A public wage release traces through to one field in the workpaperPublic wage surveyA dated, published releasetracedOne figure in the workpaper

The three approaches

They are described here as the public source describes them, without a claim about which one a given Study ends up resting on.

  • Cost

    The cost approach separates what the employee actually does into its component duties and prices each one against survey compensation for that kind of work. Its known weakness, stated in the source itself, is that allocating one person's time across many part-time roles is difficult.Source: 3

  • Market

    The market approach asks what the same position would pay if it were held by a non-owner at arm's length in a similar company. The IRS job aid calls this the most commonly used of the three.Source: 3

  • Income

    The income approach applies an independent investor test: would an outside investor be satisfied with the return, given the financial performance of the business and what the employee was paid. It needs a fair market value for the business in each year examined.Source: 3

A cited statement carries a link to the source it rests onA statement about the approachSourceOpens the public document

Adjustments and the rationale beside them

A Study names the dimensions on which the surveyed position differs from the actual role, in no particular order, and carries the Reviewer's written reason for each. What that reasoning arrives at is a judgment, and the workpaper records the reasoning rather than a rule that produced it.

  • Hours worked

    How much of the year the shareholder-employee actually spent on the business is a fact a Reviewer records and reasons from. The source treats hours as evidence to be developed, not as a formula input.Source: 3

  • Experience and proficiency

    What the person brings to the role, against what the surveyed position assumes. The Firm records this judgment in its own workpaper and signs it.Source: 3

  • Partial year of service

    A role held for part of the year is not the role the annual survey figure describes. The Study records that the difference exists and why the Reviewer treated it as they did.Source: 3
The adjustment categories named and cited in this section, beside an empty box for the Reviewer rationaleHours workedExperiencePartial yearReviewer rationaleWritten per Study by the Reviewer at the Firm

Where the judgment sits

The platform assembles evidence and shows how a figure was reached. The conclusion belongs to the Firm, reached by the licensed professional who reviews it and puts their name to it.

  • The Firm signs off through its Reviewer

    A Study is not finished when the evidence is assembled. It is finished when the Firm signs off on the derivation, having read it through its Reviewer and accepted or changed it.

  • The audit log records the sequence

    Who prepared the Study, what changed after the first draft, who approved it, and when each of those happened. The record is what makes a conclusion answerable long after the return is filed.

  • The process is shown, not summarized

    The step-by-step build, from intake to the sign-off the Firm records, is laid out on the how it works page. This page covers the reasoning; that one shows the sequence.

What this Study does not claim

  • No agency has approved the result

    No part of this process carries IRS endorsement, and nothing here should be read as one. What the Study offers is a record: the sources, the reasoning, and the Firm that signs the conclusion.

  • Correctness is not asserted by software

    Software does not certify that a figure is right. What ships is the evidence, the derivation and the written reasons behind each judgment, so a professional can weigh the figure and be seen to have weighed it.

  • The conclusion belongs to the Reviewer

    The number a Study lands on is the conclusion the Firm reached through the licensed professional who reviewed it, and the workpaper shows how it was reached. Anyone reading it can follow the same trail to the same public sources.

Sources

Public primary sources, with the date each was last retrieved. Every superscript above links here.

  1. eCFR, Title 26, Compensation for personal services

    The deduction test itself: a reasonable allowance for salaries or other compensation, for services actually rendered.

    https://www.ecfr.gov/current/title-26/section-1.162-7Retrieved 2026-09-02

  2. IRS, S corporation compensation and medical insurance issues

    The IRS position that an S-corporation must pay reasonable compensation to a shareholder-employee for services before non-wage distributions.

    https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issuesRetrieved 2026-09-02

  3. IRS, Reasonable Compensation Job Aid for IRS Valuation Professionals

    Names and describes the market, income and cost approaches. The document states on its own face that it is not an official IRS position and may not be cited as authority for a legal position.

    https://www.irs.gov/pub/irs-lbi/Reasonable%20Compensation%20Job%20Aid%20for%20IRS%20Valuation%20Professionals.pdfRetrieved 2026-09-02

  4. U.S. Bureau of Labor Statistics, Occupational Employment and Wage Statistics

    The public wage dataset behind the market comparison, published as dated releases with occupation and geography detail.

    https://www.bls.gov/oes/Retrieved 2026-08-23

Questions about the method

Who owns the finished Study?
The firm that produced it. The workpaper, its evidence and its exhibits are firm work product, exportable while the account is open and for a retention window after it closes.
Who decides the final figure?
The licensed professional through whom the Firm reviews the Study. Their name goes on the conclusion and the responsibility with it, while the workpaper carries the derivation and the written rationale that got them there.
What happens the following year?
The prior Study becomes the starting point. The annual update is a comparison against a stated baseline, with a fresh wage release and a note of what changed, rather than a build from nothing.
Which wage data is used, and can we check it?
Federal occupational wage survey data, published openly by the Bureau of Labor Statistics. A Study records which dated release it drew from, so anyone can open the same table and see the same figures.
What does a firm actually keep at the end?
The workpaper, the evidence behind each figure, the written rationale for every judgment, and the audit log of who prepared, changed and approved it. That set is what answers a question raised years later.
What does a Study deliberately not conclude?
It does not conclude that an agency has blessed the result, and it does not assert that a figure is correct because software produced it. It records a professional conclusion, the evidence under it, and the reasoning between the two.

Read the build, then judge the method

The process page walks the same work in sequence, from intake through the sign-off the Firm records.

See how a Study is builtGet started