Reasonable Income

What in the world is a ‘reasonable income’ for a small business owner?

 

Cyberworld Builders Inc is an S corporation. There are many perks, the biggest being no business tax. The IRS says that each s-corp must have at least one employee, who is paid a ‘reasonable salary’. Your salary will be subject to regular wage withholdings that any employer withholds taxes from. As the business owner, you are responsible for paying both the employee and employer share of these taxes.

Here comes the big question. What is a reasonable salary? The IRS isn’t really clear on this. Why? Most of the money the bring in is payroll taxes. Don’t try to say you make a $5,000 annual salary and received $200,000 as company payouts. The IRS will notice, sue, and win. The good news is there is a happy middle ground for everyone.

Utilize sites like glassdoor.com and bestplaces.net to see how your current location ranks in pay with other states. List your actual role for the company. Are you the lead developer? If so, look for that. Find the national average pay for someone filling that role. Here is where it becomes very important to NOT let titles get in the way. Don’t base this on CTO pay. If you live in the middle of nowhere like us, you are likely on the low end of the salary average. Cost of living in your state will point you in the right direction. Look at things like how your property taxes compared to other states, cost of gas, cost of groceries, and rent prices.The lower you rank there, the lower a believable salary can be!