1. What is Reasonable Salary for S Corp?

The reasonable salary for an S Corporation owner in California is the amount the IRS considers appropriate compensation for the services provided to the business. It's typically calculated as a percentage of business revenue (usually between 20-40%).

2. How Does the Calculator Work?

The calculator uses the simple formula:

Where:

• \( Revenue \) — Total business revenue in USD
• \( Percentage \) — Industry standard percentage (typically 20-40%)

Explanation: The calculator multiplies your business revenue by the selected percentage to determine a salary range that would likely be considered reasonable by the IRS.

3. Importance of Reasonable Salary

Details: Paying a reasonable salary is crucial for S Corp owners to avoid IRS scrutiny. The IRS requires S Corp owner-employees to pay themselves reasonable compensation before taking distributions.

4. Using the Calculator

Tips: Enter your total business revenue in USD and select a percentage between 20-40% based on your industry standards. The calculator will show the corresponding salary amount.

5. Frequently Asked Questions (FAQ)

Q1: Why is reasonable salary important for S Corps?
A: The IRS requires S Corp owners who work in the business to pay themselves reasonable compensation to avoid avoiding payroll taxes on distributions.

Q2: What percentage range is considered reasonable?
A: Typically 20-40% of revenue, but varies by industry. Service businesses often use higher percentages than product-based businesses.

Q3: What factors affect reasonable salary?
A: Industry standards, your role, experience, local wages, and business profitability all influence what's considered reasonable.

Q4: Can I pay less than the calculated amount?
A: You might pay less if you have substantial business expenses, but this increases audit risk. Consult a tax professional.

Q5: How does California treat S Corp salaries?
A: California follows federal guidelines but is particularly vigilant about proper salary reporting for S Corps.