First and foremost, the IRS defines reasonable compensation as "the value that would ordinarily be paid for like services by like enterprises under like circumstances." There are a couple of different ways you can think about this:
If you had to go out into the community and hire someone as a replacement for all the services and tasks that you perform, what would you have to pay them?
If you were to close your business and work for a competitor performing the same services and tasks that you currently perform, what would the competitor pay you for those services?
Reasonable Comp must be paid as W-2 wages before distributions are taken. IRS requires this to ensure S Corp owners pay their full share of payroll taxes.
First step is determine your reasonable compensation figure. this is essentially an assement of the fair market value of the servies you perform for your business. Once you understand your reasonable compensation figure is, you can:
The easiest and most reliable ways to determine your reasonable compensation (and the most defensible if you are ever audited) is to complete a professional reasonable compensation analysis.
