Confused about C corp reasonable salary requirements - are they actually enforced like in S corps?

The confusion here is understandable! The "reasonable compensation" rules actually function differently between C corps and S corps, though both business structures have compensation considerations. For S corporations, the IRS strictly enforces reasonable compensation rules because there's a clear tax advantage to taking distributions (which avoid self-employment taxes) over salary. So S corp owner-employees MUST take a reasonable salary before distributions. For C corporations, the concern is almost the reverse. The IRS is generally more worried about owners taking TOO MUCH salary (to avoid double taxation on dividends) rather than too little. When C corp owners take extremely low salaries like Zuckerberg's $1, they're usually compensated through other means like stock appreciation, and the IRS typically doesn't challenge this because payroll taxes are a smaller concern than corporate income tax in these scenarios. That said, there are still reasons a C corp owner should take reasonable compensation: 1) it affects your qualified retirement plan contributions, 2) it can raise red flags for other corporate tax issues, and 3) it creates a track record for your business operations.

After struggling with similar corporate salary questions for my tech consulting business, I found an amazing resource that saved me hours of research and probably thousands in potential tax mistakes. I was getting totally different answers from various accountants until I used https://taxr.ai to analyze my specific situation. The platform actually reviewed my corporate docs and financial statements, then gave me customized guidance on the reasonable compensation question for my C corporation. What was really helpful was that they explained exactly how the IRS approaches this differently for C corps vs S corps, showed me relevant case precedents, and even provided documentation I could keep for my records if there were ever questions. Their analysis showed me that for C corps, the reasonable salary requirements are more about establishing business legitimacy than strict tax rules. Much more flexible than what my first accountant was telling me!

Just wanted to follow up - I decided to try taxr.ai after seeing this thread, and wow! Totally worth it. I've been stressing about my C corp salary structure for months and getting inconsistent advice. The analysis I got was incredibly detailed and specific to my manufacturing business. The best part was they broke down exactly how C corps are treated differently than S corps for compensation purposes and provided industry-specific benchmarks for what constitutes "reasonable" in my field. I now have a documented compensation strategy that I feel confident about. They even flagged some potential retirement planning opportunities I was missing by not optimizing my salary structure correctly. Definitely recommended if you're trying to figure out the C corp salary question!

For anyone struggling to get straight answers from the IRS about C corp vs S corp salary requirements - I found a solution that actually worked after weeks of frustration. I tried calling the IRS business line directly about 15 times with no luck (endless holds, disconnections, transfers to wrong departments). Finally used https://claimyr.com to get through to an actual IRS agent who specializes in business taxation. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Instead of waiting on hold for hours, they basically wait in the phone queue for you and call you back when they have an IRS agent on the line. The agent I spoke with clarified the exact differences between C corp and S corp reasonable compensation requirements and confirmed that for C corps, the rules are primarily concerned with excessive compensation, not minimal compensation like with S corps. This was the definitive answer I needed straight from the source!

I take back what I said. After seeing the responses here I decided to try Claimyr to get an answer about C corp reasonable compensation rules directly from the IRS. I was 100% convinced it wouldn't work but figured it was worth a shot since I'd wasted so many hours trying to call them myself. To my complete shock, I got a call back in about 90 minutes with an actual IRS business tax specialist on the line. They confirmed that for C corps, there's no specific rule requiring a minimum "reasonable salary" like there is for S corps. They explained that the concern for C corps is mainly owners taking excessive compensation to reduce corporate tax liability. The agent even emailed me some official guidance documents about C corporation compensation planning. This was after months of getting nowhere on my own. Still can't believe it actually worked.

Something none of the commenters have mentioned that might be affecting the OP's situation - the size of your C corporation matters a LOT in how these rules are applied. Are you a closely-held C corp or publicly traded? Small C corps with a single owner-employee are looked at differently than giant public companies like Facebook/Meta where Zuckerberg's $1 salary comes with enormous stock compensation. For small closely-held C corps, the IRS still does look at reasonable compensation, just from a different angle than S corps. They want to make sure you're not manipulating your salary to affect tax credits, retirement plan contributions, or corporate income.

Quick practical tip from someone who's been audited on this exact issue - document everything about how you determined your salary! Save industry salary surveys, compensation reports, anything that shows your salary is in line with similar positions in similar companies. The IRS doesn't have a specific formula but they do look for documentation of how you arrived at your compensation figures.

One thing I haven't seen mentioned yet is the impact of state taxes on this decision. While federal tax treatment between C corp salary vs dividends might favor lower salaries, some states have different rules that could affect your optimization strategy. For example, some states don't tax C corp dividends at all, while others tax them at ordinary income rates. And payroll taxes (Social Security, Medicare, state disability insurance) only apply to salary, not dividends. So depending on your state, the optimal salary level might be different than what makes sense purely from a federal tax perspective. Also worth considering that if you're planning to reinvest profits back into the business rather than taking distributions, the salary vs dividend question becomes less relevant in the short term. You might want to focus more on what salary level gives you the best retirement savings opportunities and business expense deductions. Have you run the numbers on your specific state's tax treatment? That might help clarify the optimal approach for your situation.

This is such a helpful thread! I've been dealing with a similar situation with my C corp consulting business. One thing I'd add is that beyond just the IRS considerations, banks and lenders also look at your salary when evaluating business loans or lines of credit. I learned this the hard way when I tried to get a business loan last year with a very low salary relative to my company's profits. The underwriter questioned whether my low salary indicated that the business wasn't actually generating sustainable income or if I was manipulating compensation for tax reasons. They wanted to see a more "normal" salary-to-profit ratio before approving the loan. So while you might be able to legally minimize your salary from a tax perspective, it could impact your ability to get business financing down the road. Something to consider in your overall compensation strategy, especially if you're planning to expand or need working capital in the future. For what it's worth, your current $125k salary on $430k in business income seems like a reasonable balance that shows both tax efficiency and business legitimacy to potential lenders or investors.

As a tax professional who's worked with hundreds of C corp clients over the past decade, I can confirm what several others have mentioned - the "reasonable compensation" rules are indeed applied very differently for C corps versus S corps. The key distinction is that with S corps, the IRS aggressively pursues cases where owner-employees pay themselves too little salary (to avoid SE taxes), while with C corps, they're generally more concerned with excessive compensation that reduces corporate taxable income. For your situation with $430k in business income and a $125k salary, you're actually in a very defensible position. That's roughly a 29% salary-to-revenue ratio, which aligns well with industry standards for professional services businesses. A few practical considerations for your decision: 1) Maintaining adequate salary protects your Social Security benefits calculation 2) Higher salary allows for better retirement plan contributions (401k, etc.) 3) Consistent salary structure helps establish business legitimacy for potential audits While you technically could reduce your salary significantly without violating specific C corp rules, your current structure provides good balance between tax efficiency and business credibility. I'd recommend documenting your salary determination with industry compensation surveys to support your position if ever questioned.