Reasonable Compensation Study
A reasonable compensation study determines what an owner-officer should be paid for the work performed, under IRC §162. FMV applies market, cost, and income tests to the officer's actual role and documents the conclusion for the tax file.
Signed by a credentialed analystFairMarketValue
Sunbelt Electrical Contractors, Inc.
At a glance
- Basis
- IRC §162(a)(1), for Forms 1120 and 1120-S
- Prepared by
- A credentialed FMV valuation analyst
- Deliverable
- Signed report (PDF)
- Used by
- Accounting firms
- Delivered to
- The ordering bank's or firm's vault and the client's vault
When it is needed
- An S corporation owner's salary is low relative to distributions.
- A C corporation deducts officer pay the IRS may treat as a dividend.
- A benchmarking flag shows officer pay far from the peer range.
What the report contains
- Market comparison from proxy and survey data, scaled to company size
- Replacement cost floor and capital return test
- Signed memo for the file
Last updated October 24, 2026
Standards and sources
- IRC §162(a)(1)
- Deduction for reasonable compensation
- BLS Occupational Employment and Wage Statistics
- Market wage data
Documents we need
- Payroll records
- Summary of the officer's duties
- Financial statements
How an engagement works
Scope
We confirm the purpose, standard of value, valuation date, and addressee, then issue the engagement letter.
Intake
You or your client upload documents against a checklist. Open items stay visible until the file is complete.
Analysis
A credentialed analyst prepares the valuation and signs the conclusion.
Delivery
The signed PDF goes to your vault and your client's. We keep the workfile for later questions.
Reasonable compensation study questions
What is a reasonable compensation study?
A reasonable compensation study is a documented determination of the pay an owner-officer should receive for the services performed. FairMarketValue (FMV) prepares it under IRC §162 using market, cost, and income approaches, and signs a memo for the tax file.
Why does reasonable compensation matter for an S corporation?
An S corporation owner who works in the business must be paid reasonable wages before taking distributions. If salary is too low, the IRS can recharacterize distributions as wages subject to employment taxes.
Why does reasonable compensation matter for a C corporation?
A C corporation can deduct only reasonable compensation. Pay above a reasonable amount can be treated as a disguised dividend, so the corporation loses the deduction on the excess.
How is reasonable compensation determined?
Reasonable compensation is determined by comparing the officer's duties with market pay for similar roles at similarly sized companies, testing the cost to replace the officer's services, and checking that an independent investor would still earn a fair return after the pay.
What documents does a reasonable compensation study require?
A reasonable compensation study requires payroll records, a summary of the officer's duties and hours, and the company's financial statements.
How is the fee for a reasonable compensation study set?
FMV quotes the fee for a reasonable compensation study after reviewing the scope. The fee is fixed before work starts and does not depend on the conclusion of value.
Trust and reliability
SOC 2 Type II and ISO 27001 audits are underway. Our security program is documented in the FMV Trust Center.
Get a fixed-fee quote
Tell us the purpose, the company, and the valuation date. We confirm scope and quote a fixed fee before work begins.