What’s a Reasonable Salary?
The instructions for Form 1120-S, “US Income Tax Return for an S Corporation,” state that distributions and other payments by an S Corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.
The amount of the compensation will never exceed the amount received by the shareholder, either directly or indirectly. However, if cash or property or the right to receive cash and property did go to the shareholder, a salary amount must be determined, and the level of salary must be reasonable and appropriate.
There are no specific guidelines for reasonable compensation in the code or the regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.
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