Determining a reasonable salary for an S corporation shareholder is required and may be one of the most difficult tasks related to S corporation accounting and tax preparation.

S corporation shareholders enjoy tax advantages not available to owners of other entity types. Only the portion of their cash distributions that is characterized as reasonable compensation (W-2 wages) is subject to payroll taxes while the profits passed through on the K-1 are not subject to self-employment (SE) tax. Compare that to a partnership where the entire profits of general partners are subject to SE tax.

For more question about reasonable compensation for S-Corp shareholders, feel free to give us a call.