Reasonable Compensation
The IRS statutory mandate requiring active shareholder-employees to receive market-rate W-2 wages before extracting tax-free distributions.
From Latin 'rationalis' (reasonable) and 'compensare' (to weigh together, counterbalance).
Comprehensive Usage Guide
Dual Nuance AnalysisThe benchmark salary an S-Corporation shareholder must pay themselves based on industry standards for their executive duties to avoid IRS audit penalties.
“The CPA warned the consultant that paying herself a ten thousand dollar salary while taking two hundred thousand in distributions violated reasonable compensation standards.”
The primary legal landmine for software founders: setting a defensible wage that withstands IRS examination while preserving distribution tax benefits.
“Calculating reasonable compensation requires documenting actual hours spent on engineering versus executive governance.”
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Entity Structuring for Secondary Ventures: The S-Corp Tax Trap for High W-2 Earners
...S-Corporation is classified as an employee and must receive reasonable compensation through regular payroll before any distributions can be issued. This mandate triggers a c...
"reasonable compensation"Read Full Context