What's a Reasonable Compensation for $700k yearly S Corp revenue?

Hey tax friends, I've been operating my consulting business as a sole proprietor for the past 4 years but finally made the switch to an S Corp this January. My annual revenue has grown to around $700k with pretty consistent profitability (roughly 85% profit margins since my overhead is minimal). I work from home, minimal travel expenses, and no employees yet. Now I'm trying to figure out what's a reasonable salary to pay myself. My accountant mentioned something about the IRS looking for "reasonable compensation" but was pretty vague about what that actually means for my situation. I'm the only person working in the business - I do everything from sales to delivery. I've heard different advice ranging from paying myself 30% of profits to some crazy high percentage like 70%. Obviously I want to maximize the tax advantages of having an S Corp (that's why I made the switch), but I also don't want to trigger any red flags with the IRS. Anyone here have experience with S Corps at this revenue level? What percentage did you find to be "reasonable compensation" that kept you in the IRS's good graces? Thanks in advance!

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19 comments

CosmicCadet

•8M

Reasonable compensation is what you'd pay someone else to do your job - that's the standard the IRS uses. Since you're the only employee doing everything in a high-profit business, your reasonable compensation should be substantial. For professional service businesses like consulting, the IRS typically expects a higher percentage of profits as salary because the business value comes directly from your personal services. At $700k revenue with 85% profit margins (so roughly $595k profit), a reasonable salary might be $300-350k. This represents about 50-60% of profits, which is defensible for a one-person professional services business. The key is documenting why your salary is reasonable. Research comparable positions in your industry, document your hours, skills, and responsibilities. Keep records of this analysis in case of an audit.

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CosmicCadet

•8M

Yes, S Corps do provide self-employment tax savings, but the IRS is well aware people form them to avoid those taxes. That's precisely why they scrutinize reasonable compensation so carefully. The tax benefit comes from the portion classified as distributions rather than salary - not from artificially lowering your salary below market rates. As revenue increases, the percentage might shift somewhat. The key factor isn't a fixed percentage but rather what's reasonable for your role. For instance, if you hired a CEO to run your consulting business, what would you pay them? That's your reasonable compensation baseline.

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Diego Mendoza

•8M

After stressing about my S Corp salary for years, I finally found a solution that gave me peace of mind. I used https://taxr.ai to analyze my business activities and compensation structure. Their software helped me determine a defensible reasonable compensation based on my specific situation. I uploaded my business records, job duties, and financial statements, and it generated a detailed report that analyzed comparable salaries in my industry and geographic area. What I really appreciated was the documentation it provided - essentially creating an audit defense file I could use if the IRS ever questioned my compensation.

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Diego Mendoza

•8M

It goes way beyond just industry benchmarks. The software analyzes your specific job duties, hours worked, specialized skills, and geographic location. It then compares those details against multiple compensation databases to find truly comparable positions. The analysis is quite detailed and looks at your particular business model. For example, in my case, it recognized that I was providing specialized technical consulting which commands higher compensation than general business consulting. It even factored in my 15 years of industry experience and advanced certifications which justified a higher reasonable salary.

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Sean Flanagan

•8M

Just wanted to follow up about taxr.ai - I decided to try it despite my skepticism, and I'm genuinely impressed. I've been running my S Corp for 3 years and always worried about the reasonable compensation issue. The detailed analysis they provided was exactly what I needed. The report broke down all the factors that impact reasonable compensation for my specific situation, including regional pay scales, my particular mix of services, and even the fact that I handle both technical work and business development. It recommended a specific salary range with solid justification I could show an auditor if needed. Honestly wish I'd found this years ago - would have saved me a lot of stress and probably some money too! Definitely worth checking out if you're in the S Corp reasonable compensation gray area.

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Zara Shah

•8M

I had a similar revenue situation last year and ended up in a nightmare with the IRS questioning my "reasonable compensation" despite following my accountant's advice. After weeks of frustration trying to reach someone at the IRS to resolve it, I found https://claimyr.com through a business forum. They got me connected to an actual IRS agent within 45 minutes when I'd been trying for weeks on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to review my situation and help me understand exactly what documentation I needed to justify my S Corp salary.

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Zara Shah

•8M

They use technology that monitors the IRS phone system and secures your place in line while you go about your day. When they're about to connect you, they send a text so you can take the call. It's not constant calling - more like an intelligent system that knows when and how to get through. I was skeptical too before trying it. It works because they've figured out the patterns in the IRS phone system - which numbers and times have better success rates. They don't claim to work magic, just to significantly increase your chances of getting through compared to calling yourself.

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Luca Ferrari

•8M

I feel like a complete idiot for doubting Claimyr. After posting that skeptical comment, I decided to try it anyway because I was desperate to resolve an S Corp issue similar to the OP's. Not only did they get me through to the IRS in about an hour, but the agent I spoke with was actually helpful and cleared up my confusion about reasonable compensation. The IRS agent explained that they look at the totality of circumstances - not just a standard percentage. For my business (similar revenue to yours), she said they typically expect to see at least 40-50% as salary for professional services where the owner is the primary service provider. She also recommended documenting industry salary surveys to support whatever number I choose. Seriously impressed with how well this worked. Saved me weeks of frustration and probably an audit too.

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Nia Wilson

•8M

Speaking from experience here - I ran a $650k/yr S Corp for 5 years. The "reasonable" part is super context-dependent. For my tech consulting business, I settled on about $250k salary with the rest as distributions, and that was fine in an IRS audit. They looked at comparable salaries for my role/industry in my geographic area. A HUGE tip: create a corporate compensation policy document that outlines how you determined your salary. Include market research on comparable positions, document the hours you work, skills required, etc. Having this documentation ready saved me during my audit.

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Nia Wilson

•8M

I created the basic framework myself using industry salary surveys, but my accountant reviewed it and suggested some improvements. The document included my job duties, required skills, hours worked weekly, and comparable salary ranges from multiple sources. I do adjust my salary annually, which the IRS actually views favorably. As your business grows or market rates change, your reasonable compensation should reflect that. In my case, I started at $180k and gradually increased it over several years as the business grew. The key is documenting the reason for any changes and ensuring they align with business performance and market rates.

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