Reference

    Reasonable Compensation Memos

    When you elect S corporation status, the IRS requires that any owner who actively works in the business pay themselves a reasonable W-2 salary before taking distributions. There is no percentage rule and no safe harbor. What matters is whether the figure you chose can be explained, and whether that explanation was written down before the salary was paid rather than assembled afterwards.

    What the memorandum does

    A reasonable compensation memorandum is a written analysis that explains the salary number you put on your W-2. It ties the figure to published wage data and to the facts of your own business, so the reasoning behind your salary exists on paper before anyone asks for it rather than after.

    • A recommended figure, benchmarked to published Bureau of Labor Statistics wage data for your occupation, including the published percentiles for your own state.
    • Every fact carrying its source, and anything not collected printed as not obtained rather than assumed.
    • A nine factor analysis performed on the facts we collect from you, from Standard upward.
    • At Elite level, an authority table with every case checked against a commercial citator and the date of that check printed on the page, an independent investor analysis, and limitations and assumptions stated in full.
    • Prepared and signed by a licensed Enrolled Agent under Circular 230.

    The wage data is public: Bureau of Labor Statistics Occupational Employment and Wage Statistics, May 2025 estimates, published under news release USDL-26-0725. You can open it and check it. How we read it against your facts is our own work and we do not publish that. The finished memorandum shows you all of its reasoning. This page does not.

    Which one you get

    • Basic, $495. A 7 page memorandum: your figure, the published wage data behind it, every fact sourced.
    • Standard, $895. 12 to 13 pages, adding the nine factor analysis on your own facts, the employment tax consequence, your placement against the published percentiles for your state, and the retirement plan interaction.
    • Elite, $497 standalone or included with Premium at $2,495. 26 pages, adding a written narrative on every factor, the authority table, the independent investor analysis, the contemporaneous documentation package, limitations and assumptions in full, and a signed Enrolled Agent opinion.

    When you need one

    Every year you are an active-owner S-corp. The IRS does not require you to file the memo with your return, but you should have one available if the question is ever raised. Where compensation is recharacterised, the amount becomes wages, employment tax applies, interest runs from the original due dates, and an accuracy related penalty under section 6662 of generally 20 percent of the underpayment may apply. The corporation, not the shareholder, carries the employment tax liability.

    What it costs at ScorpConvert

    Included in all three packages, at 7, 12 to 13 and 26 pages respectively. Also available on its own as the Mello RC Elite Memo™ for $497, the full 26 page document, delivered by a licensed EA in 5 business days. Premium engagements are refreshed each year as the Bureau of Labor Statistics publishes new estimates.

    Ready to lock in a defensible salary number?