Founder Compensation: How Much to Pay Yourself
Written by Harry Prabandham
Curated by Rubric Financial
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IRS Reasonable Compensation Rules
- C-corps pay founders as W-2 employees; salary must be reasonable for the role and industry or the IRS can reclassify distributions as wages and assess back payroll taxes.
- S-corp owners who perform services must take a reasonable salary before distributions. Paying yourself only in distributions is a well-known audit trigger.
- Reasonable compensation is based on duties performed, hours worked, comparable salaries in similar companies, and the stage and revenue of the business.
- Document your compensation rationale in board minutes, since having a written record is your strongest defense in an IRS challenge.
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About the author
Harry PrabandhamFounder & CEO
Founder and CEO of StartupCFO. MBA from Wharton, MS in Computer Science, and decades of experience building and advising venture-backed startups.
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