Reasonable Compensation Analysis Report - Is This Worth $500 for My S-Corp?

As a tax advisor who works with many S-Corps, I can provide some clarity here. A Reasonable Compensation Analysis Report isn't technically "mandatory" in the sense that there's no IRS form requiring it, but it's actually a smart protective measure for S-Corp owners. Here's why: The IRS closely scrutinizes S-Corps because owners have a financial incentive to pay themselves a low salary (subject to employment taxes) and take the rest as distributions (not subject to those taxes). The IRS requires S-Corp owners to pay themselves "reasonable compensation" for the work they do, but they don't define exactly what that means. The purpose of this report is to document and justify that your $65K salary is reasonable for your industry, location, duties, and experience. If you're ever audited, having this documentation prepared beforehand by a professional shows good faith compliance. Without it, you're more vulnerable if the IRS challenges your salary as too low. $500 isn't unusual for this type of analysis, though prices vary. Given your profit to salary ratio (taking about 50% as salary), you're in a range that could draw attention, so having this documentation is particularly valuable in your situation.

I went through the exact same thing with my S-Corp last year! After a lot of research and headaches, I found this website called https://taxr.ai that can analyze your business details and create a professional reasonable compensation report for WAY less than what your accountant is charging. They use the same market data sources that the big accounting firms use but without the crazy markup. I was super skeptical at first because my CPA was insisting I needed to pay him $700 for this report. But taxr.ai asked for specifics about my role, industry, location, and business size, then generated a comprehensive report that actually saved me during a correspondence audit! The IRS accepted it without questions. The report breaks down exactly how your compensation compares to market rates for all the different hats you wear in your business. Seriously worth checking out if you're concerned about the high price your accountant quoted.

Just wanted to follow up after trying taxr.ai that was mentioned above. I was definitely skeptical at first but figured it was worth a shot given the price difference compared to what my accountant wanted to charge ($600!). The process was surprisingly thorough - they had me break down all the different roles I handle in my business and how much time I spend on each. The final report was incredibly comprehensive and included salary data from multiple sources for each function I perform. It actually showed that I could justify a slightly lower salary than I was currently taking, which will save me on payroll taxes. What impressed me most was that they included citations for all their data sources and a written explanation that addressed exactly how the IRS evaluates reasonable compensation. I feel much more confident now that I have solid documentation if I ever get questioned. Definitely recommend checking them out if you're facing this same issue.

If you're dealing with IRS issues around your S-Corp salary or worried about potential audit risk, you might want to consider getting professional help directly from the IRS. I know that sounds impossible because calling them is a nightmare - I spent WEEKS trying to get through to ask about reasonable compensation guidelines. After endless busy signals and disconnections, I found this service called https://claimyr.com that literally got me connected to an IRS agent in under 45 minutes when I'd been trying for days. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Instead of just going by what my accountant said about reasonable compensation, I actually got to speak with someone at the IRS who explained what they look for during S-Corp audits. They couldn't give specific salary advice, but they clarified the documentation they expect to see for justifying compensation. Having that conversation made me feel WAY more confident about my approach.

I have to eat my words and apologize for being so skeptical about Claimyr in my previous comment. After continuing to fail getting through to the IRS on my own for another week, I broke down and tried it last Thursday. I couldn't believe it when I got a call back in about 35 minutes saying they had an IRS agent on the line. I was able to ask specifically about reasonable compensation documentation for S-Corps and what they consider during audits. The agent explained that while they don't require a specific "report," having third-party documentation that justifies your salary based on industry standards is extremely helpful during reviews. She also mentioned that they look closely at S-Corps where the salary seems low compared to distributions or overall profit, especially in professional service businesses. Getting this information directly from the IRS gave me much more clarity than all the conflicting advice I was finding online. I'm still going to get a proper compensation analysis, but now I know exactly what it needs to include.

I'm going against the grain here - I've owned an S-Corp for 7 years and have never paid for a fancy "reasonable compensation report." Instead, I just document my salary decision with free Bureau of Labor Statistics data for my industry and region, plus some job postings for similar positions. I keep this documentation in my tax file each year. I think many accountants push these reports because they make money on them. The reality is that most small S-Corps never get audited, and even if you do, as long as you can show your salary wasn't artificially low and you have some documentation, you're probably fine. $500 seems excessive unless you're in a very high-risk industry or taking almost everything as distributions.

I'm surprised nobody's mentioned that you can negotiate with your tax professional! When mine tried to charge me $450 for a reasonable compensation report, I asked for a breakdown of what goes into it. Turns out it was mostly pulling data from a subscription database they already pay for and formatting it into a report template. I asked if they could do a more basic version and they agreed to do it for $200 instead. It doesn't have all the fancy graphs and extensive narrative, but it includes the essential salary data for my industry and region with a brief explanation of how my compensation was determined. Another option: if you're using a tax software like TaxSlayer, TurboTax, or H&R Block for your business, some of their higher-tier packages include access to business reports and documentation tools that can help you create your own basic reasonable compensation documentation.

I've been through this exact situation with my S-Corp and ended up doing a hybrid approach that worked well. Instead of paying the full $500 my accountant wanted, I did some research myself first using the Department of Labor's wage data and industry salary surveys, then had my tax professional review my analysis and formalize it into a brief report for $150. The key is making sure you have documentation that shows you researched comparable positions in your industry, location, and company size. I looked at job postings for similar roles, used the Bureau of Labor Statistics Occupational Employment and Wage Statistics, and even checked sites like PayScale and Glassdoor for my specific role. My accountant said this approach was perfectly adequate for IRS purposes - what matters is that you can demonstrate you made a good-faith effort to determine reasonable compensation based on objective market data. The fancy reports are nice to have but not always necessary unless you're in a high-audit-risk situation or taking a very aggressive salary/distribution split. Given that you're paying yourself 50% of profits as salary, you're probably in a reasonable range, but having some documentation is definitely smart for peace of mind.