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.
