The IRS has some guidelines that they use to decide what is “reasonable” but they don’t give out whatever actual formula or process they use to determine this. It’s supposed to be based on industry averages (more or less) but in reality it’s hard to determine what exactly that means. Generally you are “safe” paying in an industry average range, but if outside that range you need legal and accounting support to back up your own assessment.
> you are “safe” paying in an industry average range, but if outside that range you need legal and accounting support to back up your own assessment
What? The IRS doesn’t regulate wages. They just care about getting their money. If I pay you $10bn a year to yell at my cat, the IRS is fine so long as I pay payroll and you income taxes.
Similarly as an S Corp (maybe other corp types too) then officers must take at or above a reasonable wage/salary to limit the tax advantage: https://www.irs.gov/pub/irs-news/fs-08-25.pdf
This is intended to prevent people from, for instance, setting up a “nonprofit” where they just funnel all gains into their pocket while gaining all the other tax benefits of being a nonprofit. You can’t overpay people, you can’t engage in transactions where you intentionally overpay a supplier for materials/services and then they compensate you for the extra amount, etc.
