Free S corporation reasonable compensation calculator

[SeattleCPA]

As some here know, I've been playing around with ChatGPT adding calculators to my blog. After some fiddling and, er, crude design decisions, I have a calculator now that looks up bureau of labor statistics data to get S corp shareholder "reasonable compensation" numbers... then also applies a couple of other basic rules.

Would anyone be interested in seeing that? If so and if it's okay to post link, let me know. (Totally okay to say "no"... I know we're getting hit with lots of spam posts.)

[dandarc]

Edit: I'll post it. Found it here: https://evergreensmallbusiness.com/s-corporation-reasonable-wages-calculator/

Not so much a calculator as it is a lookup (and a more handy one than what I've seen elsewhere).

One suggestion - turn that giant dropdown of job titles into a combo box - lots of potential matches for what I do personally, and being able to enter text would help in filtering it down.

[SeattleCPA]

Please!

Here's the link: https://evergreensmallbusiness.com/s-corporation-reasonable-wages-calculator/

Note that the BLS data is from May 2023 (published in April 2024) so the salary numbers should be a little (5%-ish?) light. But at least you've got some numbers that should be pretty dang defensible in an (unlikely) audit:

[dandarc]

Follow up question - if the shareholder employee works part-time, does IRS consider that? I work 60-75% these days and salary + my health insurance reimbursement comes in at or just below the low-end of the "very safe" range.

[SeattleCPA]

Those 25th and 75th percentile numbers are based on a full-time annual salary. So you'd basically want to "halve" them if you worked half time.

Or in your case, you'd want to take 60% or 75% of them.

Also for what it's worth, I think nice fringe benefits factor in too. E.g., if your job includes a pension with a 25% match? That's a big number and probably makes it reasonable to have a smaller W-2.

[Smokystache]

Follow up question - if the shareholder employee works part-time, does IRS consider that? I work 60-75% these days and salary + my health insurance reimbursement comes in at or just below the low-end of the "very safe" range.

@SeattleCPA - Thanks, this is very helpful.

I'm glad someone else brought this topic up, because it is exactly what I'm struggling with - but my situation is a little more extreme. About 75% of my income comes from 1 of my services. I can set up that service to run for the entire year with less than 80 hours of work in January (this isn't it, but imagine that I sold an online course that was already created and the course was comprised of monthly content, so all I was doing each year was schedule the content to go out each month and that new subscribers would be automatically added, etc.) And then lets say I spend about 80 more hours throughout the year answering a few questions and mostly dealing with billing (although that is set up on automatic, online billing system). I lose about 5% of my clients each year and grow/onboard about 8-10% each year for modest growth and hardly any churn. So I can run that part of my business with approximately one month (160 hours) of work each year.

For simplicity, let's imagine that is my entire income. It seems like I'm just asking for an audit if I took even the high end of what I could employ someone to do (lets say $72,000/year) and divide that by 12 to adjust for the actual time I put into that part of the business. If I paid myself $6,000 and then took an owners distribution of $120,000 -- that would seem to me to be a red flag, even though it seems like I am accurately representing the time and expertise. 

It seems like there could be many of these scenarios where someone takes pre-made content (pamphlet, booklet, book. videos, etc.) and the "job" is to deliver them to customers without any other interaction. For example, another source of my income is that I sell some pamphlets that I created 10 years ago. The sales are large bulk orders that happen about once a month. The "job" at this point is to read an email to get the order, send the order to my printer who mails the pamphlets to the customer, and I send the customer an invoice and cash the check. An order might generate $3-4,000 in profit, but "the job" of delivering my pre-made product takes less than 20 minutes. The real work happened years ago, when I wrote the pamphlet, hired a designer, and went to conventions to round up my customers. But I don't need to do any of that anymore -- it's just shipping and invoicing. So how am I supposed to accurately come up with a reasonable salary vs. owner distribution?

[SeattleCPA]

It seems like there could be many of these scenarios where someone takes pre-made content (pamphlet, booklet, book. videos, etc.) and the "job" is to deliver them to customers without any other interaction. For example, another source of my income is that I sell some pamphlets that I created 10 years ago. The sales are large bulk orders that happen about once a month. The "job" at this point is to read an email to get the order, send the order to my printer who mails the pamphlets to the customer, and I send the customer an invoice and cash the check. An order might generate $3-4,000 in profit, but "the job" of delivering my pre-made product takes less than 20 minutes. The real work happened years ago, when I wrote the pamphlet, hired a designer, and went to conventions to round up my customers. But I don't need to do any of that anymore -- it's just shipping and invoicing. So how am I supposed to accurately come up with a reasonable salary vs. owner distribution?

It's hard to talk generalities and then give really specific numbers. But a handful thoughts:
1. If you were doing zero work, the reasonable salary number might be zero. E.g., if you were fully retired, the number is zero.
2. The whole reasonable comp number is what corp would have to pay someone to do similar job, so I can pretty easily believe that if the job takes (for example) 25 hours a month... and it's largely what we'd call "middle-skill" work so not super complicated or demanding work? Gosh, the number would depend on where you are but in Seattle (which is pretty HCOL), $30 an hour might be reasonable. So 25 hours a month times 12 months times $30 an hour? I think that's $9K a year. (The calculator won't calculate this for you but you can do back of envelope calculations.)
3. You'd have wanted to have paid an appropriately high salary for the creative work way back when. To use your example or even my situation where I wrote Quicken for Dummies and QuickBooks for Dummies decades ago but still receive royalties today, if we pay ourselves very little today but over time have earned a lot, I'd think we'd want some years in past with very high compensation?
4. I need to tweak the Calculator's "aggressive salary" suggestion which I'm going to do this morning when I get to the office. But once I get the fixes made, the calculator will suggest for your situation (probably) the 10th percentile. That might make sense. I.e., you don't pay very much for the job... also maybe the job is "shipping clerk" if that's really at this point the essence of your role... and because you're so light on hours you go with the 10th percentile?

Hope those ideas help. I think the main thing here is to make sure the number you choose really is "reasonable". So not a stretch. Not laughable.

[Smokystache]

@SeattleCPA - I always appreciate your thoughts and information. Thanks for taking the time.

I don't know if this is a good way to think about it, but there seems to be two mental "cutoffs" for reasonable salary. One "cutoff" is what I can reasonably prove, if audited, that my employee salary is reasonable based on publicly available facts and a truthful/transparent view of the work being done. Obviously, everyone should strive to meet this standard.

But then there might also be a second mental cutoff -- which is, even if my situation has some atypical/unusual factors, I don't want to have to deal with the stress and time of an audit, so I will set my reasonable compensation to be higher than what I think it has to be -- just to avoid the hassle factor.

Because of my situation where the job is relatively low part of the compensation and I believe I can justify a ratio of 1:5 employeee:shareholder split, I wonder if I shouldn't raise it closer to the "don't stick out among your peers" sort of ratio/numbers. The additional challenge is that the other portion of my income really is based on my expertise and education and needs to be much higher -- and that muddies the water quite a bit.

This will be my first year as an S-corp because of income level and moving to a new state that doesn't penalize LLCs -- so all of the creation of these resources was done while I was a sole-prop.

[SeattleCPA]

@SeattleCPA - I always appreciate your thoughts and information. Thanks for taking the time.

Thank you. :-)
 

I don't know if this is a good way to think about it, but there seems to be two mental "cutoffs" for reasonable salary. One "cutoff" is what I can reasonably prove, if audited, that my employee salary is reasonable based on publicly available facts and a truthful/transparent view of the work being done. Obviously, everyone should strive to meet this standard.

But then there might also be a second mental cutoff -- which is, even if my situation has some atypical/unusual factors, I don't want to have to deal with the stress and time of an audit, so I will set my reasonable compensation to be higher than what I think it has to be -- just to avoid the hassle factor.

Because of my situation where the job is relatively low part of the compensation and I believe I can justify a ratio of 1:5 employeee:shareholder split, I wonder if I shouldn't raise it closer to the "don't stick out among your peers" sort of ratio/numbers. The additional challenge is that the other portion of my income really is based on my expertise and education and needs to be much higher -- and that muddies the water quite a bit.

This will be my first year as an S-corp because of income level and moving to a new state that doesn't penalize LLCs -- so all of the creation of these resources was done while I was a sole-prop.

Two comments and fyi we do a lot of S corporation tax returns...

First, I think if you have a good reasonable salary number based on good data? That's all the law requires.

Second, IRS audits probably are becoming more common. And yes an audit is stressful and a hassle... but you are extremely unlikely to get audited with an S corporation return. The chance is like 1 in 400. Thus I would not weight that very heavily.

[Smokystache]

... but you are extremely unlikely to get audited with an S corporation return. The chance is like 1 in 400. Thus I would not weight that very heavily.

Interesting - It's helpful to have some ballpark numbers like this.

Sorry for the sidebar, but back to your calculator. I wonder if some folks looking at for the first time might look at your 4 inputs and think "Well, I'm a one-person s-corp, so what do I put in the "Highest Paid Non-Shareholder Employee Salary"? Do I leave it blank, put zero, or put in the same number as "shareholder salary"

... and now I see it ...
"If the S corporation leaves the highest paid non-shareholder employee salary input blank, the calculator assumes the only employee is the shareholder. "  - Maybe because it is such a common situation, you could add this as a footnote for that input or something. I worry that folks may not see this note below.

But this is great - thanks for the work you've put into it.

[Lamancha]

This is great.  Thanks.  It looks like we pay ourselves a smidge over the upper range.  Hopefully we aren't throwing too much money away.

[SeattleCPA]

... but you are extremely unlikely to get audited with an S corporation return. The chance is like 1 in 400. Thus I would not weight that very heavily.

Interesting - It's helpful to have some ballpark numbers like this.

Sorry for the sidebar, but back to your calculator. I wonder if some folks looking at for the first time might look at your 4 inputs and think "Well, I'm a one-person s-corp, so what do I put in the "Highest Paid Non-Shareholder Employee Salary"? Do I leave it blank, put zero, or put in the same number as "shareholder salary"

... and now I see it ...
"If the S corporation leaves the highest paid non-shareholder employee salary input blank, the calculator assumes the only employee is the shareholder. "  - Maybe because it is such a common situation, you could add this as a footnote for that input or something. I worry that folks may not see this note below.

But this is great - thanks for the work you've put into it.

Thank you. Good feedback. I'll try to look at that today.

[SeattleCPA]

This is great.  Thanks.  It looks like we pay ourselves a smidge over the upper range.  Hopefully we aren't throwing too much money away.

I wouldn't worry too much about being a little over the 75th percentile. But logically if you're over the 90th percentile, that could be too aggressive. It also may be costing you money.

I have not updated the FICA limit for 2025, but this other calculator estimates your payroll tax savings at various salaries. You might want to play with it a bit to see how much you'd save by moving your salary to the 75th percentile to maybe smack dab in the middle of the "pretty safe range":

https://evergreensmallbusiness.com/s-corporation-tax-savings-calculator/

[hayesb26]

This is great - thank you for this. Makes it seem like I'm being a little bit too conservative in my calculations. I generally advise people go 50% of net earnings.

Only comment would be to second the suggestion that you make the occupation box able to be typed into. There are so many on that list, and they are not in alphabetical order, that it's tough to sort through.

Thanks again!

[SeattleCPA]

This is great - thank you for this. Makes it seem like I'm being a little bit too conservative in my calculations. I generally advise people go 50% of net earnings.

Only comment would be to second the suggestion that you make the occupation box able to be typed into. There are so many on that list, and they are not in alphabetical order, that it's tough to sort through.

Thanks again!

Ugh. Sorry.

BTW I think you can type. But the JavaScript needs to be able to find something that looks like it matches. E.g., if you start typing "Jan" it'll return "Janitor" because it finds that job on the list.

But if you want to find the salary for a neurologist and so start typing "Neu" it won't find anything because nothing on the list starts that way.

[dandarc]

It's a standard drop-down to me - typing only matches from front of the entry in the list (and with things not sorted alphabetically, this can get a little strange).

Most websites these days that have a very long list like this have a combo box that matches any text within the entry vs. just from the beginning, and typically shows you the text you're typing as you're typing it. More usable that way - I know I found at least 4 potential items describing what I do and for the most part, they weren't clustered close together in the list. I've attached a screen capture from the accounting software I use as an example.

[SeattleCPA]

I'll see if I can figure out a way to get my little calculator working that way. As noted, I'm doing all this in JavaScript with help of ChatGPT. So this is going to be a little clunky. Sorry. And a slow process given it's tax season and I'm already waist deep in S corporation tax returns.

P.S. Truly truly thanks for feedback and constructive criticism... :-)