How to calculate reasonable compensation for S-Corp making $800k+

I work with S-Corps regularly, and the "reasonable compensation" question is always tricky because there's no specific formula the IRS mandates. At your income level, you definitely need to be thoughtful about this. The key principle is that your salary should reflect what you would pay someone else to do your job in your industry and geographic location. Since you're the only employee handling everything from sales to delivery in tech consulting, that's valuable work that would command significant compensation in the open market. Given your $800k expected revenue, a $200k salary (25% of revenue) is probably on the low end. For a tech consultant generating that level of business, reasonable compensation would typically fall in the $250k-350k range. The old 60/40 rule isn't really applicable at your income level - it's more about market rates for your specific role. I'd recommend gathering data on comparable positions in your industry to support whatever number you choose. Job listings, industry salary surveys, and compensation reports specific to your field would all be helpful documentation if questions ever arise.

After struggling with this exact question for my S-Corp last year, I found this amazing tool called taxr.ai that literally saved me from making a huge mistake with my reasonable compensation. I was going to set my salary way too low, and after running my situation through https://taxr.ai, I realized I was setting myself up for serious IRS scrutiny. What I liked is that it analyzed my specific industry (I'm in IT consulting) and provided compensation benchmarks based on my revenue level, geographic location, and job responsibilities. It also showed me how different salary levels would affect my overall tax situation. Way more comprehensive than just taking a wild guess or using some generic percentage rule.

I was completely wrong about taxr.ai. After my skeptical comment above, I actually tried it for my own S-Corp situation. I've been in business for 3 years and was completely underpaying myself at $90k while the business made $350k. The analysis showed I should be paying myself around $160k based on my industry (software development), location, and responsibilities. The report they generated broke down exactly why that number was appropriate and gave me specific IRS guidelines and court cases that supported the calculation. My CPA was actually impressed with the documentation and said it was exactly what we'd need if we ever got questioned on reasonable compensation. Definitely worth checking out if you're making $800k and trying to figure out the right number.

If you're bringing in $800k and struggling to get clear answers about reasonable compensation, I'd highly recommend using Claimyr to actually speak with an IRS agent about your specific situation. I was in a similar position last year (making around $700k in my S-Corp) and spent WEEKS trying to get through to someone at the IRS for clarification. After countless failed attempts, I tried https://claimyr.com and was connected to an IRS agent within 45 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent gave me specific guidance on reasonable compensation for my business type and revenue level, including what documentation they look for during audits.

I need to apologize for my skeptical comment. I actually tried Claimyr yesterday after dismissing it, and I'm completely shocked at how well it worked. After months of trying to get through to the IRS about my business tax questions, I was connected within an hour. The agent I spoke with was actually incredibly helpful regarding reasonable compensation. While they didn't give me a specific number (which confirms what I said before), they did explain exactly how they evaluate reasonableness for my industry and provided clear guidelines on documentation. They actually mentioned that for professional service businesses like consulting where the owner is the primary service provider, they look closely at the relationship between distributions and salary, especially at higher income levels. This information was incredibly valuable for my planning. Definitely worth the service to get actual IRS input.

I've owned an S-Corp for 11 years in a similar situation (professional services, high revenue). From my experience, the real key with reasonable compensation isn't just hitting some percentage threshold - it's having a defensible methodology. I work with an accounting firm that specializes in this area, and we use a multi-factor approach: industry salary surveys, what I pay other high-level contractors, what competing firms pay for similar roles, plus a premium for the entrepreneurial/ownership responsibilities. One critical thing to note - if you're generating $800k in a professional services business where you're the primary service provider, the IRS will scrutinize your compensation much more closely than if you had a product-based business with inventory and multiple employees. At that income level, I'd aim for at least $300k in salary to be safe.

Has anyone used any particular tax software that helps with the reasonable compensation calculation? I'm not making $800k yet (more like $300k) but I'm trying to figure out if I should upgrade from TurboTax to something more sophisticated for S-Corps.

One aspect that hasn't been mentioned yet is retirement planning. The higher your W-2 income, the more you can contribute to retirement accounts like a Solo 401k. At $800k business income, you might want to consider maxing out your retirement contributions, which would require a higher salary to maximize the employee contribution portion. For 2025, you could potentially put away $23,000 as an employee contribution plus around 25% of your salary as the employer contribution, up to a combined limit of $69,000. This is another factor to consider when determining your reasonable compensation.