Reasonable compensation starts with the work you do.

Your roles come before your salary number

A shareholder who performs services generally needs reasonable wages before receiving nonwage distributions. The IRS considers duties, time spent, training, experience, responsibilities, comparable pay, and the way the business earns revenue.

There is no universal 60/40 salary safe harbor in the IRS guidance. Treat a salary entered in a calculator as an assumption to test, not a conclusion. The IRS can reclassify distributions as wages.

Build a compensation file you can explain

A useful file tells the story of your actual work. Start with a short description of your roles, then add support for how you arrived at the pay amount.

• List your production, management, sales, and administrative duties.
• Record the time you devote to each role.
• Save relevant market-pay comparisons and note why they fit.
• Explain material differences in experience, geography, hours, and business size.
• Record the decision date and the facts used in the review.

Revisit the file when the business changes

Suppose an owner initially delivers client work personally, then hires staff and shifts into management. A compensation memo prepared years earlier may describe a job the owner no longer does. Put a pay review on the calendar and revisit it after meaningful changes.

Avoid working backward from the amount you want to distribute. First establish the compensation analysis, then evaluate cash needs, payroll, and distributions within the broader plan.

Bring facts to the conversation

Your adviser can give a more useful answer when you bring your current duties, hours, prior payroll, financial statements, and any compensation support you already have. “What should I pay myself?” becomes a much more productive question with that context.