You just gotta love the English language. We throw around a lot of words that can have different meanings. Take “reasonable” as an example. Webster’s dictionary says it means “much as is appropriate or fair; moderate; sensible.” The IRS says that means “what you would do to an unrelated third party.” (With regards to buying something, paying a fee for a service, etc.)

A little background on today’s topic. Owners of Sub-S corporations (which could be an LLC which has elected to be taxed as a Sub-S) are required by the IRS to pay themselves a “reasonable compensation.” Their reasoning is because Sub-S income is not subject to self-employment tax. READ MORE