Reasonable Compensation Study
Written by Deanna R. Ngueket, CPA. Reviewed October 2026. This page is general information, not tax advice for your situation.
If you own an S corporation and work in it, the IRS expects you to pay yourself a reasonable salary through payroll before you take distributions. I work out what a reasonable salary is for your role and put the support in writing, so you have a clear answer if the IRS ever asks. I work with business owners in Houston, Spring, Humble, Atascocita and across Texas.
The study is a fixed-fee written report for each shareholder who works in the business.
What the study looks at
What you receive
- A written report for each working shareholder, with a recommended salary and the support for it
- A 30-minute meeting to walk through the report and answer your questions
- Practical next steps for setting up or adjusting payroll
What it costs
Reasonable compensation study
$500 per shareholder report.
Planning an S election at the same time? S election planning and a reasonable compensation study together are $750.
The fee is paid in full before the study begins. Running payroll is not included; anything the study leads to is quoted separately before any work starts.
How this leads to planning. A review or study is how I find out whether tax planning fits you, and what kind. My Tax Concierge planning is built around each taxpayer and each business, so it is quoted once your review or study is complete.
How it works
Free 15-minute consultation
We talk through your business and whether a study is the right next step.
Engagement letter and payment
You sign a short engagement letter and pay the study fee.
Send your information
Your recent business returns, a current profit and loss statement, your current pay and a description of your role.
I prepare your report
I research comparable pay and document the salary that fits your role.
Report meeting
A 30-minute meeting to go over the report and how to apply it.
Not included
- Running payroll or filing payroll tax returns
- Filing an S election (see my business entity review)
- Preparing the business or individual tax return
- Defending a salary in an IRS examination (quoted separately)
Frequently asked questions
Can I skip the salary and just take distributions?
No. The IRS says an S corporation must pay reasonable compensation to a shareholder-employee for the services they provide before non-wage distributions may be made. Courts have upheld the IRS treating distributions as wages when an owner-employee was underpaid.
What does the IRS look at?
The IRS lists factors courts have used, including training and experience, duties and responsibilities, time devoted to the business, dividend history, pay to non-shareholder employees, and what comparable businesses pay for similar services. The study works through these for your business.
How often should the study be updated?
When your role, your hours or the business changes in a meaningful way. Many owners revisit it each year as part of their planning.
Want to read more first?
See my article on S corporation reasonable compensation.
Sources: IRS: S Corporation Compensation and Medical Insurance Issues · David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012)
Talk it through
Book a free consultation, or call 713-730-9792.
