--- title: "Reasonable compensation: Definition and Sources | Tax Glossary" description: "Reasonable compensation is the fair salary an S corporation must pay an owner who works in the business before the owner takes other distributions." url: https://wallacecpa.multisites.ai/glossary/reasonable-compensation publisher: Wallace CPA phone: +1-877-682-1171 quote: https://wallacecpa.multisites.ai/contact --- 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](https://wallacecpa.multisites.ai/glossary/s-corporation) entry. The [payroll page](https://wallacecpa.multisites.ai/services/payroll) covers running the pay. [Wallace CPA can helpPayroll services](https://wallacecpa.multisites.ai/services/payroll) ## Related terms - [S corporation](https://wallacecpa.multisites.ai/glossary/s-corporation) - [Self-employment tax](https://wallacecpa.multisites.ai/glossary/self-employment-tax) - [Payroll tax](https://wallacecpa.multisites.ai/glossary/payroll-tax) - [Qualified business income deduction](https://wallacecpa.multisites.ai/glossary/qualified-business-income-deduction) ## Sources 1. [IRS: S corporation compensation and medical insurance issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues) ## Talk to Wallace CPA 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. [Call (877) 682-1171](tel:+1-877-682-1171)[Send a message](https://wallacecpa.multisites.ai/contact) 180 State Street, Suite 225, Southlake, TX 76092