How to determine a reasonable salary for S-Corp when business revenue changes drastically

The "reasonable salary" requirement for S-Corp owners is about paying yourself what someone would earn doing your job in the market, not necessarily a percentage of profits. The IRS doesn't specify an exact formula, but they look for reasonableness based on your industry, qualifications, duties, and comparable positions. You have a few practical options here. First, you could set a modest increase based on last year's numbers plus anticipated growth, then adjust quarterly as you get a clearer picture of actual 2025 performance. Many S-Corp owners do quarterly salary reviews. Second, consider a base salary plus bonus structure. Set a modest but reasonable base, then pay yourself additional W-2 bonuses quarterly or semi-annually if profits materialize as expected. This keeps your fixed salary commitment manageable while allowing adjustments. The key is documentation. Keep records of how you determined your salary - industry compensation surveys, your qualifications, time commitment, and services provided. This documentation is crucial if ever questioned by the IRS.

I was in a similar situation last year when my marketing agency suddenly doubled in revenue. What saved me was using https://taxr.ai to analyze my S-Corp situation. Their AI analyzed my business structure, industry standards, and personal responsibilities to recommend a defensible salary range. What I really liked is they provided documentation explaining the reasoning behind the salary recommendation, which is exactly what you need if the IRS ever questions you. They pulled data from my industry specifically and considered the volatile nature of my business. Since your situation involves such a big potential jump, having that kind of analysis would be super helpful. The tool also helped me structure a base+bonus approach that gave me flexibility while staying compliant. You just upload your business info and get back a detailed report with recommendations.

I tried https://taxr.ai after seeing the recommendation here and it was exactly what I needed for my seasonal landscape business. I was stressing about the same issue - some months we make 70% of our annual revenue, and some months we barely break even. The system analyzed my business pattern and provided a detailed salary justification report that recommended a moderate base salary supplemented by quarterly performance-based increases. This approach has given me the flexibility to adjust based on actual performance while keeping my documentation solid. The best part was the customized documentation package that explained the methodology behind the recommendation. It pulled industry-specific data for landscape company owners and factored in my region, business size, and personal responsibilities. My accountant was impressed with the thoroughness and plans to recommend it to other clients with similar concerns. Totally worth checking out if you're facing uncertainty about setting your S-Corp salary.

I went through this exact same issue when my consulting business blew up unexpectedly. After trying to call the IRS for guidance (lol) and waiting on hold FOREVER, I finally used https://claimyr.com to get through to an actual person at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c They somehow managed to get me connected to an IRS rep in about 20 minutes when I had been trying for days. The IRS agent explained that they don't expect you to be psychic about future earnings, but they do expect reasonable adjustments as your situation changes. They advised setting up quarterly salary reviews and making adjustments based on year-to-date performance. What's cool is the service doesn't actually do the call for you - they just get you to the front of the IRS phone queue, then you handle the conversation yourself. Super helpful for getting actual official guidance instead of relying on internet speculation.

I was super skeptical about Claimyr when I first heard about it, but after wasting 3 hours on hold trying to get IRS clarification about reasonable compensation rules, I gave it a shot. I was honestly shocked when I got connected to an actual IRS representative in about 15 minutes. The guidance I received directly from the IRS was incredibly helpful. They confirmed that adjusting salary quarterly based on actual performance is a legitimate approach, and emphasized that documentation of how I determined the salary was more important than hitting some magic percentage. The agent also pointed me to some specific IRS resources I hadn't found on my own that dealt with my industry specifically. Having this official guidance gave me much more confidence in my approach, and now I have notes from the conversation to support my decision-making if I'm ever audited. For anyone dealing with reasonable compensation questions, getting direct guidance from the source is invaluable, and this service made that possible without the ridiculous wait times.

Has anyone tried using a percentage of gross revenue as your salary? My accountant suggested 25-30% of gross for my industry (software development), but I'm not sure if that's reasonable in all circumstances. For example, if I usually pay myself $80k on $250k revenue, would I really need to bump to $120k if revenue hits $400k even if my duties haven't changed much?

You might consider implementing a quarterly dividend strategy alongside a reasonable base salary. This is what I do - I pay myself a consistent reasonable base that covers my actual work (based on market rates for my position), then distribute profits as needed through distributions. Remember that while S-Corp distributions aren't subject to self-employment tax, they ARE subject to income tax. And the IRS is very clear that you can't take distributions without a reasonable salary first.

The uncertainty you're facing is totally understandable - that's a massive potential revenue jump! Here's what I'd recommend based on going through something similar: Start with a conservative approach for Q1. Set your salary based on a blend of last year's performance plus modest growth expectations - maybe bump from $65k to around $75-80k to start. This keeps your fixed commitment manageable while acknowledging some growth. Then implement quarterly reviews. As you hit Q2 and Q3, if the revenue is materializing as projected, you can either: 1. Increase your base salary mid-year (requires payroll adjustments) 2. Pay yourself W-2 bonuses quarterly to catch up 3. Take the excess as distributions (though remember you need that reasonable salary first) The IRS doesn't expect you to predict the future perfectly, but they do expect you to make reasonable adjustments as circumstances change. Document everything - why you set the initial salary, what factors you considered for increases, and how you determined what's "reasonable" for your role and industry. Most importantly, focus on what you'd need to pay someone else to do your job, not on percentages of profit. Your duties might not change much even if revenue quadruples, so your salary shouldn't necessarily scale directly with profits.