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The IRS requires “Reasonable Compensation” be paid to S-Corporation Shareholders and General Partners in a Partnership in order to avoid a notice or audit. The question, therefore, is, “What is reasonable?” Below are three methods to determine a reasonable salary with a focus on the Cost Approach preferred for closely held entities which represent the majority of clients in my practice.
The Three Methods of Determining Reasonable Compensation
It is important to match each method with the business’ size and business owner’s job duties.