Reasonable Salary Worksheet

The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" — and it's one of the most scrutinized areas in S-Corp audits. Too low, and you risk IRS reclassification of distributions as wages. Too high, and you're paying unnecessary payroll taxes. Use this worksheet to arrive at a defensible number.

What the IRS looks for: A reasonable salary is what you'd pay a third party to perform the same services. It should reflect your industry, your role, your hours, and your local market — not just what's convenient for tax purposes.

Step 1 — Define Your Role

What services do you personally perform for the business?

List the primary functions you perform (e.g., client work, sales, operations, management). Be specific — this is your job description if the IRS asks.

Primary role / job title:

Hours per week in the business:

Years of experience / credentials:

Step 2 — Research Market Rates

Look up what employers pay for your role in your area. Use at least two sources and document them.

Source	Job Title Searched	Location	Salary Range Found
BLS.gov (Bureau of Labor Statistics)	write in	Colorado / Fort Collins	$_____ – $_____
Indeed.com / LinkedIn Salary	write in	write in	$_____ – $_____
Glassdoor / Salary.com	write in	write in	$_____ – $_____
Industry association / trade data	write in	write in	$_____ – $_____

Step 3 — Apply Adjusting Factors

Start with the midpoint of your market research, then adjust up or down based on these factors.

Factor	Direction	Your Adjustment
Part-time vs. full-time hours	↓ if part-time	$_____
Specialized skills / certifications / licenses	↑ if highly specialized	$_____
Business profitability (can the business afford it?)	↓ if startup / low profit	$_____
Geographic cost of living	↑ for high-cost areas	$_____
Management / ownership responsibilities beyond the role	↑ for significant mgmt duties	$_____

Step 4 — Calculate Your Reasonable Salary

Salary Summary

Market midpoint (from Step 2)

Total adjustments (from Step 3)

Your Reasonable Salary

As a % of total S-Corp net income

Rule of thumb: Most CPAs recommend your salary be at least 40–60% of your S-Corp's net income. If your salary is below 30% of net income, expect more scrutiny. Document your methodology and keep this worksheet in your records.

Step 5 — Document & Review Annually

Keep this on file

The IRS can audit S-Corp reasonable salary determinations. Keep this worksheet, your salary research sources, and any notes from your CPA in your business records. Review and update your salary each year as your business grows.

Date of this analysis:

Reviewed by (CPA / advisor):

Next review date:

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Jim specializes in S-Corp reasonable salary determinations and can help you set a defensible salary that minimizes your tax bill without triggering IRS scrutiny.

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