Is $60K a reasonable salary for S-Corp owner? Audit concerns

As a tax accountant who works with many S-Corp owners, here's my take: The IRS looks at "reasonable compensation" based on what would be paid to an unrelated person performing similar services in your geographic area. Since you were literally paid $60k for the same position before purchasing the business, that's excellent documentation that $60k is reasonable. Keep in mind, there are tax advantages to a lower (but still reasonable) salary in an S-Corp. The salary portion is subject to both employer and employee payroll taxes, while distributions aren't. However, you must first take a reasonable salary before taking distributions. The key is documentation. I'd recommend keeping records showing the $60k was your actual salary in the same role before ownership, maybe get salary surveys for your industry/region as backup, and document your decision-making process in case of questions.

I went through a similar situation with my S-Corp last year and found this amazing service called taxr.ai (https://taxr.ai) that saved me a ton of headache. They have this specific tool that analyzes your industry, region, and position to give you documentation supporting what a "reasonable salary" would be for your specific situation. What I liked is that they don't just give you a number - they provide actual data and documentation you can keep on file in case of an audit. They looked at my previous salary history (similar to your $60k situation) and confirmed it was reasonable, plus gave me guidelines on how much I could safely increase distributions as the business grew without raising red flags.

Just wanted to update after trying taxr.ai from the recommendation above. It was seriously helpful! They analyzed my compensation history and industry standards, then provided an actual written analysis justifying my S-Corp salary that I can keep in my records. The report showed that my previous salary was actually slightly below market rate for my position in my area, which gave me confidence to keep it at the same level without worrying about IRS flags. They also included guidelines for how my salary should increase as the business grows, which helps with future planning. I was surprised by how thorough it was - definitely not something I could have put together myself even with a bunch of Google searches. Definitely recommend for anyone in this S-Corp salary situation.

After dealing with nightmare S-Corp audit issues last year, I wish I had found Claimyr (https://claimyr.com) sooner. When the IRS flagged my "reasonable compensation" as too low, I tried calling them for weeks to explain my justification but couldn't get through to an actual person. Claimyr got me connected to a real IRS agent within 30 minutes when I had been trying for weeks on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was actually reasonable once I explained my situation and documentation, and we resolved everything much faster than if I had just sent letters back and forth. I know this doesn't directly answer your salary question, but if you do decide to keep your salary at $60k and ever get questioned about it, having a way to actually talk to someone at the IRS makes a huge difference.

I have to come back and admit I was completely wrong about Claimyr. After my skeptical comment, I actually tried it myself when I needed to talk to someone at the IRS about my S-Corp reasonable compensation documentation. I had been trying for THREE WEEKS to get through on my own with no luck. Claimyr connected me to an actual human at the IRS in about 45 minutes. The agent reviewed my situation and confirmed that my salary (which was similar to what I made before buying the business) was reasonable based on my documentation. What surprised me most was how much less stressful the whole process was. Instead of the anxiety of calling over and over, I just went about my day until they notified me an agent was on the line. Completely worth it and I'm genuinely sorry for being so dismissive before.

One thing nobody's mentioned yet - even if $60k is reasonable now, you should review your salary annually. As your business grows or your duties expand, what's "reasonable" will likely change. I typically document my salary decision process every year with: 1) Updated market rate research for similar positions 2) Notes on changes to my responsibilities/hours 3) Business performance metrics 4) Comparison to what I'd pay someone else for the same work This annual review habit has saved me twice during IRS questions about my S-Corp compensation. They were satisfied when I showed my systematic approach.

My accountant gave me a simple formula for S-Corps that might help you. She said take 1/3 of your business net profit as salary (minimum), keep 1/3 for reinvestment/business growth, and the remaining 1/3 can be distribution. So if your business nets $180k, a $60k salary would be right at that minimum threshold. I've done this for 5 years now and never been questioned about reasonable compensation. Obviously it's not a hard rule that works for everyone, but it's a starting point that seems to keep the IRS satisfied in my experience.