The Owner-Pay Defensibility Kit

Two things at once. First, whether the salary you pay yourself is defensible against the IRS reasonable-compensation standard — it returns DEFENSIBLE, THIN, or RECLASSIFICATION RISK from your own numbers. Second, and separately, whether the distribution you're about to take is even safe to pull — a dispositive DO NOT DISTRIBUTE check against your tax reserve, working-capital floor, and (for multi-owner S-corps) proportionality. A split can be perfectly tax-defensible and still be a draw the business can't afford, so the kit grades both and tells you which problem you have.

No — that's the most important thing to understand. The 60/40 rule (and the 50/50 rule) is folklore with no basis in the Internal Revenue Code, the Treasury Regulations, or any IRS guidance. There is no safe harbor and no approved ratio. Reasonable compensation is a facts-and-circumstances test: what an unrelated employer would pay for the same services in the same area, for the work you actually perform — the standard from Watson v. Commissioner. Using a percentage of profit as a formula can itself invite scrutiny if it produces a salary that diverges from market wages for your role. That's why this kit hard-codes no number and grades your split only against the market wage you supply.

Because two configurations are dispositive on their own, and the gate catches them regardless of the score. A $0 salary while taking distributions is the single biggest documented red flag — courts have uniformly ruled against zero-salary S-corps. And a salary set below half the market wage you entered for your own role is the core reclassification pattern. When either fires, the verdict is RECLASSIFICATION RISK no matter how strong the other factors look, because services performed for the S-corp must first be paid as reasonable W-2 wages before distributions. The fix is to raise the salary toward your market wage and document the rationale.

No, and keeping them separate is the point. DO NOT DISTRIBUTE is about cash and structure, not taxes: it fires when the draw would break your tax reserve (you'd be spending money you owe the IRS), drop cash below your working-capital floor (which a lender expects to see and your operations need), or — for a multi-owner S-corp — break the proportionality S-corps must maintain, which can jeopardize S-corp status entirely. It supersedes the tax verdict because a defensible split is irrelevant if the business can't afford the draw. The kit shows the cash reason so you know to cut the draw, separate from any salary fix.

No. It's deterministic and offline — you enter your own dollar figures and it computes the verdict locally. It performs no IRS lookup, queries no wage database, uses no AI, files nothing, and grades a compensation position, not a person. The same math runs in the workbook, the on-page demo, and (under the hood) the spreadsheet, so all of them agree to the number. You bring the inputs — especially your own honest estimate of the market wage for your role — and it surfaces how defensible your numbers are so you can take a documented position to your CPA.

No. This is a planning and documentation aid, not tax or legal advice, not a CPA opinion, and not an audit shield. It does not set your salary, prepare your payroll, or file your return, and reasonable-compensation rules and enforcement posture change over time. Use it to pressure-test your own numbers and surface the gaps before an examiner does — then have a CPA or tax advisor review and document your reasonable-compensation position. Reasonable compensation is one of the most-scrutinized small-business tax issues, and in 2026 audit selection is AI-assisted; a documented, market-aligned position reviewed by your advisor is the actual defense.