S Corps for Law Firms – Reasonable Salary

Jul 28, 2018

What’s a reasonable salary for the owner of a law firm?

The IRS won’t specifically define reasonable, there are only guidelines.  The IRS notes that the courts have considered the following facts when reviewing salary levels:

  • Duties and responsibilities.
  • Time and effort devoted to the business.
  • Dividend payment history.
  • Payments to non-owner employees for similar work.
  • Timing and manner of paying bonuses to key people.
  • Payment by comparable businesses for similar services.
  • Compensation agreements.
  • Usage of a formula to determine compensation.

Thankfully, you’ll find a wide pay range that you can prove to be reasonable.  A top indicator is the amount that your firm would pay a third-party employee to do the job.  You can find documentation in job ads, trade surveys, from headhunters, or internet services like Salary.com or PayScale.com.

The key is documenting proof of a reasonable salary by gathering facts to support the salary taken, at the time of the salary decision.  Retain the proof in your firm’s tax file.

What’s an Unreasonable Salary?

  • Zero salary.  No unrelated lawyer would work for your firm for free.
  • Salary below minimum wage.  Realistically, you wouldn’t sway a non-owner to accept a job paying below minimum wage.  As a professional, minimum wage will likely be considered unreasonable by the IRS.

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