22 Sep Avoiding the Audit Trap: Finalizing S-Corp Reasonable Compensation for 2025
Running your business through an S-Corporation can bring major tax advantages, but it also comes with added responsibility, especially when it comes to how you pay yourself. One of the biggest red flags for the IRS is unreasonable compensation for S-Corp owners. If your salary does not make sense based on your role and business income, you could face penalties, back taxes, or even an audit.
At Acumaxum, we help business owners make confident, informed decisions that drive profit and protect their bottom line. As you finalize your 2025 financials, now is the time to review your compensation strategy and ensure you are in compliance before the IRS comes knocking.
What Does “Reasonable Compensation” Mean?
“Reasonable compensation” is the salary an S-Corp owner would pay someone else to do the same job. In simple terms, if you are actively involved in your business, handling operations, managing employees, or delivering services. You need to pay yourself a fair wage for that work.
The IRS looks at several factors when deciding if your pay is reasonable, including:
- Your role and responsibilities
- The size and profitability of your company
- What similar businesses pay for similar work
- Your experience and time commitment
If your salary is too low compared to what is typical in your industry, the IRS may reclassify part of your distributions as wages. This can lead to back payroll taxes, penalties, and interest.
Why This Matters Before 2025 Ends
Finalizing reasonable compensation before year-end is a key part of your tax strategy. Paying yourself correctly affects your taxes, retirement contributions, and your ability to qualify for certain deductions or credits.
Here’s how to stay on track:
- Review your 2025 profits.
Look at your year-to-date revenue and expenses to determine a fair, defensible salary. - Document how you set your salary.
Keep notes or reports showing how you arrived at your number, such as market comparisons or advisor recommendations. - Balance salary and distributions.
Paying yourself too much or too little can both hurt your tax strategy. Find the balance that aligns with IRS expectations and supports healthy cash flow. - Consult with a financial expert.
Acumaxum’s CFO team helps business owners calculate compensation based on industry data and growth goals, reducing audit risk while keeping profits optimized.
Protect Your Business and Your Profit
Do not let an audit derail your success. Setting your S-Corp compensation correctly is about more than compliance, it is about creating a tax-smart foundation for long-term growth.
At Acumaxum, we help business owners make strategic decisions that protect profits and minimize risk. Schedule your consultation today to finalize your 2025 compensation strategy with confidence and peace of mind.