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.

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. For current guidance, see IRS Form 2553 instructions. 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.

How long does the IRS have to audit my tax return?

The standard statute of limitations is three years from the date the return was filed or due, whichever is later (IRC 6501(a)). If you omit more than 25% of gross income, the statute extends to six years (IRC 6501(e)). There is no statute of limitations for fraud or failure to file a return; the IRS can audit these situations at any time. Filing an amended return does not restart the clock on the original return but does open a new three-year window for items changed on the amendment. You can consent to extend the statute (Form 872) if the IRS requests it during an audit, which is common when the audit is still in progress near the expiration date. Refusing the extension may cause the IRS to issue a deficiency notice based on incomplete information.

Related guides:

• S-Corp Reasonable Salary: The IRS Factors, BLS Benchmarks, and How Much Is Too Low

• S-Corp Reasonable Compensation: How to Set Your Owner Salary

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.