The One Number You Cannot Diagnose Yourself
You can read a lab panel in seconds.
You can spot a diagnosis three questions into an intake.
But there is one number sitting inside your S corporation that you almost certainly cannot grade on your own; the salary you pay yourself.
You know a right answer exists.
You know getting it wrong can create some kind of problems.
And you have no clean way to check your own work.
That gap is exactly where I spend my days.
Why “Reasonable” Keeps the IRS Interested
Here is the mechanic in plain terms.
Salary carries payroll tax; distributions do not.
That asymmetry tempts owners, and frankly a fair number of preparers, to shrink the salary and inflate the distribution until the FICA bill gets pleasantly small.
The IRS is aware of this game; they wrote the rules to it.
Reasonable compensation is one of the most dependable S Corp audit triggers there is, and a physician makes an unusually bright target.
Nobody at an examination believes a psychiatrist’s clinical work is worth $80,000 while $400,000 quietly walks out the door as a distribution.
Your own competence, in other words, can be used against you.
The Framework I Keep Coming Back To
If you have caught my Wednesday live sessions lately, you have heard me land on this topic more than once.
My best wisdom on this topic is that you need to pay yourself the lesser of two numbers:
✓ Roughly half of your practice’s net income; or
✓ The cost to replace your position at market rate in your geographic area, in other words what you would actually have to pay someone to do your job where you practice.
It’s understandable if the first number eludes your full understanding.
Essentially, you can’t be expected to pay yourself money you’re not actually generating in cash.
That’s not reasonable.
Now that second number, replacement salary, is the one most business owners never bother to calculate.
It is also the one that makes your salary defensible; because it is anchored to something an examiner can verify rather than something you wished into existence.
A defensible salary is not the number that felt comfortable back in January.
It is the number you could explain out loud to an auditor without your voice changing pitch.
What Happens When the Number Cannot Be Defended
When the IRS decides your salary was too low, they do not send a strongly worded letter and move on.
They recharacterize your distributions as wages.
Then come the back payroll taxes, the penalties, and the interest; all calculated on money you already spent.
And “my accountant set it” is not a defense; it is a confession that nobody ran the math.
This Is a Setting, Not a Set-And-Forget
Here is the part a once-a-year preparer will never mention.
Your defensible salary is not carved once and left alone.
Your net income moves.
Your hours move.
Market compensation for your specialty in your city moves.
A number that was perfectly defensible three years ago can quietly drift out of range while nobody is watching; the same way an untreated condition does.
That is the whole difference between a filing transaction and a planning relationship; between someone who records what you did and someone who tells you whether it was the right thing to do in the first place.
Find Out Before the IRS Does
You cannot grade your own salary, and now you know why that is not a failing.
It is simply not your instrument to read.
That’s where I come in.
I will tell you whether the number you are paying yourself would survive scrutiny, and what it should be instead.
It’s time to stop guessing at a number this potentially expensive.