When to revisit reasonable compensation for S-corp clients

For many accounting firms, reasonable compensation becomes a priority only at two moments: when an S corporation client is under audit and when year end planning reveals the numbers are off.

Both situations create stress, rushed analysis and avoidable cleanup.

Post tax season is the ideal time to step back and proactively review reasonable compensation for S corporation clients, before payroll decisions compound, distributions stack up and next season’s issues begin to take shape.

Why reasonable compensation issues usually start small

Most reasonable compensation problems do not stem from bad intent. They develop gradually:

• Officer salaries that have not been adjusted in years
• Business growth that outpaces payroll increases
• Role changes that are not reflected in compensation
• New services or revenue streams added to the owner’s workload

Individually, these changes may appear minor. Over time, they can create a material compliance gap, one that often goes unnoticed until an audit notice arrives or year end planning highlights a problem.

Post-season is when firms have the clearest view of what actually occurred during the year, making it the most defensible time to proactively address reasonable compensation.

Reviews reduce year end scrambles

Waiting until Q4, or worse, the following filing season, limits a firm’s options. Payroll corrections become more difficult, documentation is thinner and explanations tend to feel reactive.

A post season review allows firms to:

• Identify compensation gaps early
• Make incremental payroll adjustments during the year
• Document rationale while facts are still fresh
• Avoid large retroactive corrections or amended filings
• Enter planning season with cleaner, more reliable numbers

In practice, post season review shifts reasonable compensation from a cleanup exercise into a controlled compliance process.

Clients are more receptive after filing season

Timing also matters from a client perspective.

Immediately after filing, business owners are more aware of tax exposure. They are less rushed than during the deadline season and more open to proactive changes rather than fixing last year after the fact.

Framing the discussion as “Let’s make next year cleaner and safer” tends to resonate far more in May or June than during fall extensions or January fire drills.

Documentation still matters, even without an audit

A common misconception is that reasonable compensation documentation only matters once an audit begins. In reality, documentation matters precisely because audits are retrospective.

When an examiner looks back, they are evaluating:

• What the officer actually did
• What the business could reasonably afford
• How compensation was determined
• Whether the decisions were reasonable at the time they were made

Reviews allow firms to document compensation decisions contemporaneously, rather than attempting to recreate intent several years later.

That distinction matters.

Making reasonable compensation a repeatable post season process

Many firms are now standardizing reasonable compensation reviews as part of their post season workflow, particularly for S-corp clients with:

• Consistent profitability
• Material distributions
• Owner operators filling multiple roles
• Growth in revenue or headcount

By reviewing compensation after filing, but before the year is too far along, firms create a predictable rhythm that reduces risk without adding pressure to the busy season.

Next steps for doing a reasonable compensation review

When you’re ready to discuss a reasonable compensation review with your clients, consider using RCReports.

RCReports offers reliable and immediate insights into reasonable compensation for closely held businesses. It provides accurate and independent reasonable compensation calculations, incorporating industry, legal, IRS criteria and proprietary salary data intelligence. 

Special benefit: NATP members receive a 10% discount on any plan.