Why are CEOs paid $1 salary with stock compensation but small business owners can't do the same?

12 Thanks for explaining! So if I understand correctly, the big CEO's stock compensation still gets taxed as ordinary income at some point? Does that mean if I tried to pay myself in actual shares of my company instead of dividends, it would be treated differently than just taking distributions?

5 The stock options or RSUs that CEOs receive are considered compensation and are taxed as ordinary income when exercised or vested - so yes, they're still paying income taxes (and the company is still paying payroll taxes on that compensation). If you tried to pay yourself in shares of your company, those shares would be valued at fair market value at the time they're granted, and you'd owe income tax on that value. This is different from distributions, which aren't subject to payroll taxes but are still subject to income tax. The IRS is mainly concerned that small business owners might try to characterize what should be salary (subject to both income and payroll taxes) as distributions (subject only to income tax) to avoid those payroll taxes.

14 How accurate do you think this tool is compared to just asking an accountant? I've gotten different answers from different tax pros about what's "reasonable" for my construction business.

17 Does it work for different business structures? I have an LLC that's taxed as an S-Corp and I'm never sure if I'm paying myself enough salary vs distributions.

8 The tool uses actual IRS guidance and court cases to create its analysis, so I found it more comprehensive than what my accountant initially provided. My accountant was giving a blanket "50% of profits" rule, while the tool provided industry-specific benchmarks based on real compensation data. It absolutely works for different structures including LLCs taxed as S-Corps. That's actually my exact situation too. It separates out what portion of your business income is from your actual services (which should be salary) versus what's return on investment/capital (which can be distributions).

22 Wait, you're saying there's a service that can actually get you through to a real person at the IRS? That sounds too good to be true. I spent 3 hours on hold last month and never got through.

15 I'm skeptical. How does this even work? And why would I want to call attention to myself by calling the IRS directly about my compensation strategy? Isn't that just asking for an audit?

9 Yes, it really works! The service basically keeps calling and navigating the IRS phone system for you until it gets through, then calls you to connect you. I was connected in about 12 minutes when I tried it. Getting information from the IRS directly isn't calling attention to yourself - you're not providing your specific details when asking about general guidelines. I didn't identify myself or my business when asking about reasonable compensation standards. It's actually better to understand the rules correctly than to operate based on assumptions and risk problems later. The agent provided general guidance that was really helpful for my planning.

19 Does this apply the same way for an LLC that elects S-Corp taxation? Also, where does that 30-40% guideline come from? I've heard everything from "market rate salary" to "whatever you can justify" to specific percentages.

11 Yes, it applies exactly the same for an LLC that elects S-Corp taxation - the tax treatment is identical regardless of the state-level business entity. The 30-40% isn't an official IRS rule - it's just a general guideline that tax professionals often use as a starting point. The IRS doesn't publish specific required percentages. What they care about is that your salary is "reasonable" compared to your duties, industry, and business profits. I've seen cases where the IRS has accepted much lower percentages when there were legitimate reasons (like a capital-intensive business where profits come mostly from equipment rather than owner labor).

7 Oh yikes, that's exactly what I'm worried about. How did they determine what was "reasonable" in your case? Did they give you specific criteria or just decide 40K wasn't enough?

They looked at several factors: what similar marketing agency owners in my area were paying themselves (they used Bureau of Labor Statistics data and some industry surveys), how many hours I was working (basically full-time), and the fact that most of my business income was directly from my personal services rather than passive investments or equipment. They also noted that I was the only employee doing the high-level work. The auditor said 40K was "unreasonably low" for someone generating 250K in a service business where I was essentially the primary revenue generator. They reclassified about 80K of my distributions as wages. The lesson I learned is that in service businesses especially, you can't get away with tiny salaries because most of the profit is directly tied to your labor.

This is really helpful - the governance aspect makes a lot of sense. I hadn't considered that public company boards provide that independent oversight layer. So essentially the IRS trusts that independent directors wouldn't approve unreasonable compensation, but they can't make that same assumption for self-dealing small business owners. Your point about deferring vs. avoiding taxes is key too. I was thinking the CEOs were getting some magical tax benefit, but they're just shifting when they pay, not whether they pay. Meanwhile I'd actually be avoiding those payroll taxes entirely on the distribution portion. Do you know if there are any safe harbors or specific documentation practices that help justify your reasonable compensation decision to the IRS if questioned?

There aren't official IRS "safe harbors" for reasonable compensation, but there are definitely documentation practices that help if you get audited. I'd recommend keeping records that support your compensation decision: 1) Industry salary surveys or BLS data showing comparable positions in your area 2) Documentation of your actual duties and time commitment 3) Analysis of how much business income comes from your personal services vs. business assets/capital 4) Records of any third-party validation (like compensation studies or CPA recommendations) Some CPAs recommend doing an annual "reasonable compensation study" that documents these factors. It won't guarantee you won't get questioned, but it shows you made a good faith effort to comply rather than just picking an arbitrary low number. The closest thing to a safe harbor is probably ensuring your salary isn't drastically lower than what you'd find on job sites for similar roles in your industry/location. If you're within a reasonable range of market rates and can document why, you're in much better shape than someone paying themselves 20% of market value just to minimize taxes.