Identify the work before selecting comparables.
Write down revenue-producing, management and administrative responsibilities. Record time spent, experience, supervision and how those duties changed. A consultant delivering all client work and a shareholder managing a staffed operation do not present identical facts.
The IRS considers duties, experience, time and effort, comparable pay and compensation arrangements among other factors. It can treat distributions as wages where payments represent compensation for services. A fixed 60/40 or other universal split is not an IRS safe harbor.
References: IRS S-corporation compensation
Make the supporting evidence understandable.
A job title alone may conceal several roles. Describe what a replacement person would actually do and why a comparison is relevant. Keep the source, geography, time period and assumptions behind any compensation information. Explain adjustments rather than retaining an unexplained final number.
This is an organizational checklist, not a prescribed valuation method or a claim that a particular survey proves reasonableness. The analysis and deliverable need to be agreed with an adviser.
Reconcile the decision with actual payments.
A written conclusion and the payroll records should tell a consistent story. Identify wages already processed, distributions, other owner transfers and proposed changes. Do not simply relabel transactions at year end without reviewing payroll, reporting and correction implications.
Compensation planning may interact with retirement contributions and cash needs. Deferrals and employer contributions for an S-corporation employee depend on W-2 compensation, not shareholder distributions. Review the whole decision before reducing pay.
References: IRS S-corporation retirement contributions
Illustration: separate tasks in the same role.
Suppose an owner delivers client engagements, supervises two staff members and handles billing. A useful fact summary distinguishes delivery, supervision and administration rather than describing the person only as “owner.” The adviser can then evaluate relevant compensation evidence and the business facts.
No salary, tax savings or distribution amount follows from this illustration. It deliberately omits a numerical result because the missing compensation evidence would determine the analysis.
When to revisit and who implements.
Review a material change in duties, staffing, working time or business operations before assuming the old documentation still describes the role. Agree the trigger and scope for any later update.
A compensation analysis does not automatically run payroll, amend a return or answer an IRS notice. Identify the responsible payroll provider and filing adviser. If the IRS has raised the issue, agree representation and the response deadline separately.
Questions before the next step.
Is there a safe salary percentage?
No universal salary-to-distribution percentage establishes reasonable compensation. Actual services and supporting facts matter.
Does every shareholder need the same salary?
The services each person performs and the relevant compensation facts need review. Ownership percentage alone does not determine pay for work.