Your S Corporation Salary: What We Are Doing and Why
Prepared for you by [FIRM NAME]
[FIRM LOGO]
Every year, we look at the salary your S corporation pays you and write down how we arrived at that figure. This page explains what that work involves, what we need from you, and what you get at the end of it.
It's a short, ordinary piece of the annual work. You'll be asked some questions about your own job. Nothing about it requires you to pull numbers out of the books or know anything about tax rules.
Why is my salary being reviewed?
Your business is an S corporation. When an owner also works in the business, the tax rules treat part of what the business earns as wages for that work. The rest can reach you as a distribution, which is simply money taken out of the business outside of payroll.
There's no fixed percentage and no standard number. The right wage depends on your own facts: what you do, how much time you spend doing it, what the business earns, and what similar work pays in your industry and area.
So once a year we gather those facts and document how we reached the figure we used. That's what this study is. The questions we ask you are how we get it right for your situation rather than guessing at it.
Key Takeaways
This is routine annual work
every S corporation owner who works in the business faces the same wage question each year.There is no standard percentage
your figure comes from your own facts, not from a formula or a rule of thumb.You answer questions about your role and your time
you're the only person who knows what you actually do all week.We supply every financial figure
you never need to open the books, calculate anything, or estimate a percentage of revenue.A licensed professional at our firm reaches the conclusion
the process organizes the evidence, and a person reviews it and decides.You receive the reasoning, not just a number
the figure, why it landed where it did, and the sources behind it, kept in your file.
1. Why your accountant is doing this
When you set your business up as an S corporation, you took on one particular obligation: if you work in the business, the business pays you a wage for that work, and it runs through payroll like any other employee's pay. Money you take out beyond that wage is a distribution.
The question every year is what that wage should be. The rules don't give a number. They point at your circumstances instead: the work you perform, the responsibility you carry, the hours you put in, how the business earns its money, and what comparable work pays elsewhere.
That is the IRS's own framing: it treats officer compensation as a facts-and-circumstances question and publishes the factors it looks at (IRS, S corporation compensation and medical insurance issues).
That's a judgment call, and judgment calls are better when they are written down. So we do the work once a year, on purpose, and we keep a record of how we got there. Doing it deliberately is easier than reconstructing it later from memory.
2. What happens
The study has three parts, and they happen in this order.
You answer questions about your role and your time. What you do in the business, what you can decide without asking anyone, how your working week splits between the work customers pay for and the work of running the company, and anything unusual about this year. These are questions only you can answer.
We supply the financial figures. Revenue, payroll history, distributions, prior-year numbers, and how the business earns what it earns. We pull all of that from the books and the return. You're never asked to estimate a percentage or look up a figure.
A licensed professional at our firm reviews everything and reaches the conclusion. The wage figure is set by a person here, on the record, after looking at your answers, the financial figures, and wage information for comparable work. That step is the point of the whole exercise, and it doesn't get delegated to software.
3. What we need from you
One thing: the client questionnaire we sent with this page (Part A of the organizer).
It covers your role, your responsibilities, your hours, and how your time divides across the different kinds of work you do. It also asks a few open questions, like who decided your pay and whether anything about this year was out of the ordinary.
A few things worth knowing before you start:
- Answer from memory.
- Nothing in it requires you to open the accounting file.
- Approximate is fine.
- If your week splits roughly in half between two kinds of work, say roughly half. We're not looking for precision you don't have.
- "None" and "there is no formula" are real answers.
- Most small companies have no written pay agreement and no formula behind the number. That's normal and it isn't a problem.
- Tell us the unusual things.
- An illness, a long leave, a large new contract, a location that opened or closed. Those facts matter to the conclusion, and we won't know about them unless you mention them.
The second part of the organizer is ours. We fill it in from your books and your return, and you never see it as homework.
4. What you will get
At the end you get a documented figure and the reasoning behind it: what your role was understood to be, what wage information was used, where that information came from, what was adjusted and why, and who reached the conclusion.
That record goes into your file at [FIRM NAME] and stays there. Three years from now, if anyone asks how your salary was determined, the answer is written down rather than remembered.
It also makes next year lighter. Once your facts are on the record, the following year starts from what we already know and focuses on what changed.
5. What this is not
This matters, so we want to be direct about it.
This is not a guarantee.
It's a documented, good-faith conclusion based on your facts as we understand them this year.This is not an IRS ruling or an IRS approval.
No one at the IRS reviews or blesses this figure. There is no filing that makes a salary official in advance.This is not a promise about any future examination outcome.
We can't tell you how a future review of your return would go, and any professional who tells you otherwise is overstating what this work can do.
What the study does is more modest and more useful: it puts the reasoning behind your salary on the record, at the time the decision was made, with the sources it rests on attached.
Questions
If anything in the questionnaire is unclear, or you're not sure how to describe part of your own role, contact us at [FIRM NAME] before guessing. A two-minute conversation is worth more than a filled-in blank.
Prepared by [FIRM NAME]. This page explains our process and is general information, not tax advice for any specific situation; please talk with us about your own circumstances. The conclusion in your study is reached by a licensed professional at our firm. The software we use to document it is a product of TracePrep Inc., not a CPA firm; it does not review or approve that conclusion. The source citations in your workpapers support the record behind the figure; they do not guarantee any IRS outcome.
That is the client half. The firm half is the file behind it.
See how a Study is built, or open an engagement and work a real file.