Reasonable Compensation for Software Developers in Texas

Reasonable compensation is the salary an S-corp must pay its owner-employees for services performed. The IRS defines it as the amount a third-party employer would pay for the same work. For Software Developerss in Texas, BLS OES data provides a defensible market benchmark. The IRS expects shareholders who perform services for the corporation to receive a salary comparable to what similar employees would earn.

The IRS evaluates multiple factors: prevailing wages for the same work in the same region (BLS data is widely accepted), the owner's training and experience, duties and responsibilities, time devoted to the business, and what comparable businesses pay for similar services. No single factor is determinative — documented evidence across multiple factors strengthens your position.

If the IRS determines that an S-corp owner took distributions that should have been wages, it can reclassify those distributions as W-2 wages and assess back payroll taxes plus interest and penalties. The IRS specifically targets situations where shareholder-employees take minimal or no salary while receiving large distributions — a pattern that avoids FICA taxes.

Document your reasoning before filing, not after. Useful evidence includes: (1) BLS OEWS wage data for your occupation and state (this page uses the latest published BLS OEWS release), (2) comparable job postings showing market rates for Software Developerss in Texas, (3) a written description of your duties and time allocation, (4) minutes of any board/shareholder resolutions setting salary. Consult a CPA to build a complete audit defense file.