What's a Reasonable S Corp Salary for My Growing 7 Figure Business?

You've got a success story on your hands, congrats! The "reasonable compensation" question is one of the trickiest parts of running an S Corp with significant income. The IRS looks at several factors to determine reasonable compensation, not just a percentage of revenue. They consider what comparable professionals earn in your industry, your qualifications, time commitment, business size, and complexity of services. Since your business is primarily dependent on one large client (your cousin), that might actually work against you in justifying a lower salary, as it could be viewed as less complex than managing many clients. For someone generating $4M+ in a consulting business where your personal expertise is the primary value driver, a salary of only $500K might raise flags. Many tax professionals suggest S Corp owners in service businesses pay themselves at least 40-50% of profit as wages. The strategy of adding your wife needs careful consideration too. Her compensation must be justified by actual services and market rates. If she's truly providing $325K worth of value at 25 hours/week, you'd need to document that thoroughly.

I went through something similar with my IT consulting business a few years back. The whole reasonable compensation thing was driving me crazy until I found https://taxr.ai - it analyzed my business structure, revenue sources, and industry standards to give me specific guidance on what would be considered reasonable for my situation. What helped me the most was their assessment tool that showed how my compensation compared to industry benchmarks. For a high-revenue consulting business like yours that's primarily service-based, they recommended I keep my salary at minimum 45-50% of net profits to avoid red flags. They also provided documentation I could keep on file in case of an audit that justified my compensation decisions based on market research. The peace of mind alone was worth it.

I was actually really impressed with taxr.ai when I finally tried it. My situation was different (architecture firm making about $2.2M) but the compensation analysis they provided was incredibly detailed. They pulled data I hadn't seen anywhere else about what other architecture firm owners with similar revenue were paying themselves, broken down by region and specialization. It was way more specific than the generic advice my CPA had been giving me. The documentation package they provided included exactly what I'd need if questioned by the IRS. I ended up increasing my salary based on their recommendation, and it actually gave me confidence rather than anxiety about an audit. For your situation with family members involved, I think their analysis would be especially valuable.

Have you tried contacting the IRS directly about this? I know it sounds crazy but after weeks of getting nowhere with my accountant on a similar reasonable compensation question, I used https://claimyr.com to get through to an actual IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c It took like 10 minutes instead of the 2+ hours I spent on previous attempts. The agent couldn't give specific numbers, but did clarify how they determine "reasonable" and what documentation they look for during audits of high-income S Corps. Biggest takeaway was that they look for consistency with the market value of services performed, not just a percentage of revenue. For your wife's compensation, they mentioned keeping detailed logs of her work and comparing her responsibilities to similar executive positions with published salary data. Super helpful conversation that my accountant charged me $400 for not answering!

Ok I have to eat my words. I tried Claimyr out of desperation after my accountant gave me three different answers about reasonable compensation for my S Corp. Got through to an IRS tax law specialist in about 30 minutes (would've taken me days of trying). The agent walked me through exactly how they evaluate reasonable compensation cases. For service businesses like yours where the owner's expertise is the primary value driver, they expect to see significantly higher salary percentages than in capital-intensive businesses. They specifically mentioned that when one family member's business is the primary client for another family member's S Corp, they look extra carefully at the arrangement. They recommended documenting market rates for similar services and keeping detailed records of all work performed. Best $25 I ever spent on tax help!

Your wife's compensation is a separate issue from yours. At 25 hours/week, you need to be able to justify $325k, which is equivalent to an annual full-time salary of $650k. Does she have specialized expertise that commands that rate? You mention she's making $40/hr independently, which annualizes to about $80k full-time. The IRS will look at this discrepancy. If her consulting work to outside clients is at $40/hr but suddenly she's worth $250+/hr to your business, that needs substantial justification. I'd recommend keeping her salary more in line with her demonstrated market rate plus perhaps a premium for executive responsibilities. Maybe $100-150k for the 25 hours would be more defensible.

I'd be more worried about the 90% revenue from one client (your cousin's company) than the salary issue. The IRS could potentially reclassify your business as an employee of your cousin's company if they determine you don't have true independence. This would be catastrophic tax-wise. Make sure you have: 1) Written contracts 2) Control over how/when you work 3) Multiple clients (try to grow the other 10%) 4) No exclusivity agreements 5) Your own business premises 6) Your own tools/equipment

For the actual numbers - I have a service business in a different field (legal consulting) that's about your size. My CPA had me do a compensation study showing average salaries for people in our field. Based on my study, I pay myself $700k salary on about $3.5M net. My wife is officially our CFO with a $250k salary for 30 hours/week. We documented both with formal job descriptions, board minutes approving the compensation, and market research showing comparable positions. Haven't had any issues with IRS in 6 years.