Minimum “reasonable salary” on $68K income?

Determining a Fair Salary: What Should Your Minimum Reasonable Salary Be on a $68K Income?

As you navigate the complexities of running your own business, setting up payroll for your newly established S-corporation is a significant step. A common question many entrepreneurs face is: What’s the minimum reasonable salary based on my company’s net income?

In your case, with a net income of $68,000, you’ve received some guidance from your accountant suggesting a minimum salary of $20,000. While this figure might reflect basic compliance criteria, it can feel surprisingly low, particularly when you compare it to industry standards—like the average salary of $63,000 for copywriters listed on Glassdoor.

So, what factors should you consider when determining a more appropriate salary?

  1. Industry Standards: It’s crucial to examine average salaries within your profession. Benchmarking against peer salaries not only helps in establishing self-worth but also shields you from scrutiny by the IRS, who may question salaries that seem disproportionately low relative to industry norms.

  2. Role Responsibilities: Evaluate the specific responsibilities you’ve undertaken as a business owner. Your contributions in driving the business forward—whether you’re managing projects, bringing in new clients, or handling marketing—should be factored into your salary.

  3. Tax Considerations: Payment structures can influence your tax obligations. It’s essential to strike a balance between drawing a reasonable salary and maintaining enough profit for reinvestment in your company.

  4. Business Growth: As your business expands, so too may your earnings potential. Consider future projections and how your salary fits into your long-term financial strategy.

Ultimately, while a minimum salary of $20,000 might keep you compliant from a technical perspective, it’s worth considering a figure that better aligns with your industry and your personal contributions. Remember, paying yourself a reasonable salary is not just about meeting legal obligations; it’s also about valuing your hard work and the skills you bring to the table.

Establishing a salary that reflects both the market standards and your role can pave the way for a successful business journey, so take the time to dive deep into these considerations.

1 Comment

  1. bdadmin

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    Determining a “reasonable salary” for an S-Corp can be a bit nuanced, especially considering factors like your industry, your role, and overall business performance. The IRS mandates that S-Corp owners who actively participate in their businesses must pay themselves a reasonable salary, which should reflect the typical compensation for similar roles in the industry while aligning with the business’s income.

    Understanding Reasonable Salary

    1. Industry Benchmarks: As you mentioned, the average salary for a copywriter is about $63K, according to platforms like Glassdoor. It’s crucial to align your salary with industry standards to ascertain what can be considered “reasonable.” You may also look into other resources such as the Bureau of Labor Statistics (BLS) or PayScale for broader compensation data.

    2. Your Involvement: The amount of work you put into the business affects your salary. If you’re fully immersed and contributing significantly to your business operations, your salary should reflect that enhanced effort and responsibility.

    3. Business Structure: Ensure that your salary is proportional to the net income of the business after necessary expenses have been deducted. Notably, if your net income is $68K, paying yourself only $20K might not align with other aspects of your financial situation.

    Calculating a Reasonable Salary

    1. Comparative Analysis: Start by gathering salary information for positions similar to yours, factoring in your experience, education, and working conditions. If the average salary is around $63K for copywriters, you might want to consider a salary in that range, especially if you are doing comparable work.

    2. Consult Tools and Resources: Check platforms like Salary.com, Indeed, or industry-specific resources to gather comprehensive data about what others in your position earn. This will give you a more informed perspective on setting your own salary.

    3. Assess Business Needs: Remember that while setting a higher salary might seem like a good move, it must also be sustainable for your business, especially when considering the need for reinvestment and potential fluctuations in income. Balance your personal compensation needs with the financial health of your S-Corp.

    4. Document Your Decision: Whichever figure you decide upon, keep comprehensive records justifying your salary structure. This might include documentation of industry salary ranges, the work you’re doing, and any other factors influencing your pay. This documentation is important should the IRS ever question the salary you set.

    Practical Advice Going Forward

    • Discuss with Your Accountant: If your accountant recommends a much lower salary, have a discussion about what criteria they used. It may be beneficial to obtain a second opinion or conduct further research to make informed decisions.

    • Consider Future Changes: Be open to adjusting your salary as your business grows or as your personal financial situation changes. If your net income increases significantly, it might warrant reevaluating your compensation strategy.

    • Educate Yourself on Payroll Taxes: Remember that paying yourself a salary also means dealing with payroll taxes. Ensure you calculate the employer taxes accurately on whichever salary amount you decide to pay, and understand how this will impact your net income.

    While your accountant’s suggestion of $20K might be a conservative approach, make sure that you arrive at a figure based on thorough research and considerations unique to your situation. A reasonable salary not only fulfills legal requirements but also helps position your business for long-term success.

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