Tax law requires S corporations to pay shareholder-employees reasonable compensation. The S corporation reasonable compensation calculator below estimates that number based on Bureau of Labor Statistics data, what a S corporation pays other employees, and what distributions and wages a shareholder receives. Additional information about the calculator appears beneath the calculator.
Additional Information and Instructions
The S corporation reasonable compensation calculator suggests possible S corporation salary amounts based on shareholder distributions, shareholder wages, the highest paid nonshareholder’s wages, and the Bureau of Labor Statistics data for the job.
The distributions a shareholder-employee receives matter for a simple reason. The Internal Revenue Service can reclassify distributions as wages if an S corporation pays unreasonably low wages to a shareholder-employee.
The amount the highest non-shareholder-employee earns also matters. In most situations, a shareholder-employee would need to be paid more than a non-shareholder employee.
The calculator also considers the most up-to-date Bureau of Labor Statistics annual wages data for more than 800 occupations. More specifically, if available, the calculator grabs the 10th, 25th, 50th, 75th and 90th percentile annual wage amounts. The data used in this version of the calculator reflects May 2023 annual wages which means roughly two years of inflation have occurred since the data were collected. (The BLS published the data in April of 2024.) Thus, S corporation shareholder should inflate appropriately the amounts shown here by roughly five percent.
Understanding the S Corporation Reasonable Compensation Amounts
The S corporation reasonable compensation calculator estimates three amounts.
The calculator estimates the lowest possible, or “Aggressive,” S corporation reasonable compensation amount by identifying the smallest of the following three amounts: the S coporation distributions and wages the shareholder-employee will receive during the year, the annual wages paid to the highest-paid non-shareholder employee, and the 10th percentile annual wages number available from the Bureau of Labor Statistics. The calculator suggests the smallest of these values is probably as aggressive as one should be.
Example: An S corporation pays its shareholder $15,000 in wages and another $45,000 in distributions. (That totals $60,000.) Say the S corporation employs another non-shareholder employee and pays that person $50,000. Also say that the tenth percentile annual wage for the job equals $70,000. In this case, the calculator looks at those three numbers ($60,000, $50,000 and $70,000) and suggests that probably $50,000 is as low as the S corporation should pay its shareholder.
Note: If the S corporation leaves the highest paid non-shareholder employee salary input blank, the calculator assumes the only employee is the shareholder. In that case, if the S corporation pays its shareholder $15,000 in wages and another $45,000 in distributions (again $60,000 in total) and the tenth percentile annual equal equals $70,000, the calculator looks at those two numbers ($60,000 versus $70,000) and suggests that the S corporation should pay $60,000 in wages. (This would mean the S corporation should pay zero distributions.)
The calculator estimates the “Pretty Safe Salary Rage” as any amount falling between the 25th and 75th percentiles assuming those values are available. The idea here is that if a shareholder’s compensation sits at a level where one in four people in the same job make more or make less, probably the shareholder-employee’s compensation falls within the range of “reasonable.” Note that if a particular annual earnings percentile is unavailable, the calculator displays “Unknown.”
The calculator estimates a “Very Safe Salary” as the greatest of the following values: The highest annual wages value available from the Bureau of Labor Statistics for an occupation or the wages paid to the highest non-shareholder employee. In other words, if an S corporation pays its shareholder-employee the highest annual wages value reported by the Bureau of Labor Statistics? Or, if even higher, the wages paid the highest paid non-employee working for the S corporation? That’s a pretty safe number.
Tips for Using the Calculator
A handful of tips. First, the calculator uses national averages. If an S corporation shareholder-employee works in a locality with salaries vastly different than the national average, that difference may undermine the usefulness of the calculator’s estimates. Employers may want to nudge the calculated value up or down to adjust for this.
Second, some small corporations employ shareholders in “more than one hat” roles where the worker does two or three jobs on a part-time basis. Thus, some situations will require the S corporation to average salaries from multiple positions to get to a reasonable compensation estimate.
A third and related tip: You probably want to experiment with different Bureau of Labor Statistics’ occupations. The list the calculator looks at is long. And your job may fit well into more than one category.
Fourth finally, this note from a tax accountant who reviewed the earliest version of this calculator: If a small business corporation’s profits are very modest, the calculator’s “Pretty Safe Salary Range” may be impractically high. A firm generating, say, $20,000 in profits before paying shareholder-employees their wages may not be able to pay anything close to the 25th percentile. Thus apply common sense. And understand that for very small (and probably for very large) S corporations, you may need to take the calculator’s suggestions with a grain of salt.
Related Resources for S Corporations
If you’re working to really maximize your S corproation’s tax savings, you might be interested in this recent blog post: Advanced S Corporation Tax Planning Secrets.
You’ve maybe already seen this other calculator, but you can estimate the payroll tax savings your S corporation produces using the S Corporation Payroll Tax Savings Calculator.
If you’ve got access to ChatGPT, you may also want to get its rather useful input on the appropriate salary to pay an S corporation shareholder-employee. We’ve got more information about that here: Using ChatGPT to Determine S Corporation Reasonable Compensation for Shareholders.