Business entities
Reasonable compensation
Reasonable compensation is the fair salary an S corporation must pay an owner who works in the business before the owner takes other distributions.
An S corporation owner who does work for the company is an employee. The IRS says the corporation must pay reasonable compensation for those services before it makes non-wage distributions. Payroll tax applies to that salary.
The IRS can reclassify distributions as wages if the salary is too low. It looks at what the owner does, training, time worked and what similar businesses pay. A low wage may save tax now but raise audit risk. Set the pay with the facts in mind and record the reasoning. See the S corporation entry. The payroll page covers running the pay.
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Call the Southlake office and say what you need: a return, an IRS letter, your books or a new business. Have the notice or last year's return nearby if you have one.