Renner Business News; October 26, 2026

S corporation owners and directors should document the basis for owner salary for their permanent records. As the end of the year approaches, S corporations should be aware of IRS scrutiny relating to reasonable S corporation officer compensation and should plan on documenting as a part of the corporation’s annual minutes all officer annual compensation.

Tax professionals can provide guidance and help evaluate whether the salary is reasonable, but the owner is most familiar with their industry, job duties, responsibilities, experience, and time spent working in the business. S corporation owners should document in writing compensation for officers and S corporation owners for their records and include with their documentation research related to area labor costs, analysis of owner/officer hours and special skills required.

“Tax professionals should inquire that S corporation owners have considered S corporation compensation with respect to the owner’s services to the S corporation and reasonable compensation rules,” said CPA Joanne Rodgers, senior manager at Renner and Company, CPA, P.C.

The IRS is considering the use of AI on returns or other means to compare officer salary to S corporation distributions to generate IRS notices to S corporations, which include questions regarding the entity’s industry, owner’s hours, duties and annual compensation.

Technology Being Used to Identify Suspicious Salaries

California has begun using algorithms to flag low salaries. California agencies are cross-checking tax records, particularly W-2 wages against S corporation distributions. Discrepancies can trigger audits with limited human review. One owner was assessed $3,000 in additional tax, penalties, and interest after reusing a prior year’s salary figure without updating the analysis.

According to a speaker in a recent webinar, IRS executives have discussed a proposed reasonable compensation program modeled on CP2000 notices. Owners might be asked to provide information about their industry, job duties, and hours worked, potentially through a QR code. The IRS could then propose an amount owed that the taxpayer could pay or dispute.

This remains a proposed possibility and not a confirmed IRS program.

As the use of AI increases, other states and the IRS may ramp up inquiries for owners to justify officer wages.

Compensation Should Be Justified with Annual Documentation

According to the IRS website, related to S corporation compensation, there are many factors to consider in determining if the S corporation owner’s compensation is reasonable:

  • Training and experience: The owner’s qualifications and expertise
  • Duties and responsibilities: The work performed and level of responsibility
  • Time and effort: The hours and effort devoted to the business
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • Amounts comparable business pay for similar services in the area
  • Compensation agreements

Be on the defensive and document officer and owner wages as a part of the annual corporation records to justify reasonable compensation.

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