S-Corp Reasonable Salary: How to Set It by Industry Without Triggering an IRS Audit
The “reasonable salary” requirement is the most common S-Corp audit issue. The IRS requires shareholder-employees to pay themselves compensation that is “reasonable for the services actually rendered” before taking tax-free distributions. Setting the salary too low (to minimize FICA taxes) risks reclassification of distributions as wages, plus penalties. Setting the salary too high wastes the S-Corp’s primary tax benefit. The right salary is defensible, documented, and based on market data.
A reasonable salary is what the S-Corp would pay an unrelated person to perform the same services in the same geographic area. The primary sources for establishing the salary are Bureau of Labor Statistics (BLS) data, salary surveys (Robert Half, Glassdoor, Indeed), and industry-specific compensation studies. The salary should reflect ALL services the owner performs, including technical work (the trade or profession), management (hiring, firing, business decisions), and administrative work (bookkeeping, marketing, client relations). An owner who is the sole worker (doing everything) typically has a salary in the 50th-75th percentile of the BLS category for their trade, plus an adjustment for management responsibilities. An owner who manages employees and does limited technical work may have a salary closer to a general manager or operations director for the industry. The IRS considers multiple factors: training and experience, duties and responsibilities, time devoted, comparable salaries paid by similar businesses, compensation paid to non-shareholder employees, dividend history, and the use of a formula vs. comparable analysis.
What are typical reasonable salaries by industry?
The following ranges are based on BLS median wages (2024), adjusted for owner-level responsibility (owners typically earn 10-30% above the median employee in their field because they bear management responsibility):
Trades (plumbing, HVAC, electrical, construction): $60,000-$90,000. BLS median for plumbers: $63,000; for HVAC: $57,000. An owner-operator who also manages the business: $70,000-$85,000.
Professional services (consulting, marketing, IT): $70,000-$110,000. Depends heavily on the specialization and geographic market.
Medical (dental, veterinary, medical practice): $100,000-$200,000+. Professionals with clinical licenses have high market comparables.
Real estate agent: $45,000-$70,000. The BLS median for real estate agents is approximately $56,000, but top-producing agents can justify $60,000-$80,000.
Cleaning business: $35,000-$50,000. The BLS median for janitors/cleaners is approximately $33,000; an owner-operator with management duties: $40,000-$50,000.
Salon/grooming: $35,000-$50,000. The BLS median for hairdressers is approximately $35,000; a salon owner with management duties: $40,000-$50,000.
Photography: $40,000-$60,000. The BLS median for photographers is approximately $40,000; a successful wedding photographer with business management: $45,000-$55,000.
Coaching/consulting: $55,000-$85,000. Depends on the coaching niche and client base.
How do you document the salary?
What are the red flags?
The IRS is more likely to audit S-Corp salaries when:
- The salary is below $20,000 for a full-time owner (almost never defensible)
- Distributions are 5x or more than the salary
- The salary has not increased despite growing revenue
- The salary is below the minimum wage for the hours worked
- The S-Corp has no other employees and the owner pays themselves the minimum
The safest position: set the salary at 40-60% of the combined salary + distribution amount, or within the BLS range for the owner’s role, whichever produces the higher number. A salary that is clearly within the market range is difficult for the IRS to challenge.
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Yarik Yarosh, CPA. "S-Corp Reasonable Salary: How to Set It by Industry Without Triggering an IRS Audit." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-scorp-reasonable-salary-guidelines
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.