
Ask HN: Sources to determine "reasonable compensation?" for web CEO's - clintavo
I started a web company about 8 years ago, on the side.  Three years ago I went full-time and have been fortunate that it is now providing me with a good income.<p>My CPA and Lawyer have recommended that I incorporate (I've been operating until now as a sole-proprietor), which I am in the process of finalizing.<p>After incorporating, I must, under IRS rules, pay myself a salary of "reasonable" and comparable compensation.  For tax reasons, I want this salary to be as low as possible, but can't go lower than what would be normal and reasonable for a CEO/Software Developer of a profitable but small (under $1 million in revenues) web company.<p>Does anyone have any source or advice on how to come up with a reasonable number?
======
pelle
It sounds like you are incorporating an S-Corp. There aren't really any IRS
rules like that for C-Corps, which is why Steve Jobs can get paid $1 pa.

The rule is essentially there to make sure that you pay FICA. The limit for
paying FICA in 2008 is $10,200. So that should be a safe reasonable
compensation. Anything you pay yourself on top of this should be done as an
S-Corp distribution.

That said you could probably get away with paying less. But really your CPA
should be able to guide you on this. You may be able to get away with $50k pa.

~~~
tptacek
You missed a zero there, right? $102,000. $50k sounds sane, presuming you
don't distro yourself $100k on top of it.

~~~
pelle
You are right I missed a zero.

------
Mystalic
Reasonable to the IRS just means you aren't giving yourself a $300 salary and
saying that's payment. Calculate general cost of living and use that number.
You can justify that number to the IRS.

~~~
brentb
I would highly recommend against just paying yourself just cost-of-living. A
low salary and high dividend is a big-time audit flag for the IRS... if your
salary AND your dividends are low, then there's no problem.

You state that your company is profitable. In this case, if you pay yourself a
low salary and get audited, the IRS can (and will) retroactively adjust your
salary to whatever THEY feel is reasonable and comparable for a CEO of a
successful small company. Then you will owe back taxes, penalties and interest
on whatever amount they determine you cheated them out of. The process isn't
very democratic and getting audited is a HUGE pain, so I'd recommend going
with something reasonable in the 100K range to avoid scrutiny.

------
fnazeeri
According to this ([http://www.altgate.com/blog/2008/10/2008-startup-
compensatio...](http://www.altgate.com/blog/2008/10/2008-startup-compensation-
survey.html)) 10-year old survey executive compensation of 600+ venture-backed
startups, a founding CEO of a software company with <$5MM in revenue is in the
$160-230K range (25th %ile and 75th %ile respectively). As an aside, equity is
in the 8-30% range (same percentiles).

This isn't terribly helpful to you question since it's for venture-backed
companies, but it's at least an upper threshold.

~~~
clintavo
Thanks, fnazeeri, this study actually is helpful and does provide some useful
data, I think it will be very helpful to have a professionally done
compensation study if necessary to show the tax man.

~~~
tptacek
There are two extreme data points you're getting here:

(1) The absolute lowest number people think you could get away with.

(2) The ridiculous numbers awarded to vanity CEOs of VC-funded companies.

You probably want to be somewhere in the middle. There's no rule about what a
"CEO" makes; you're compensated based on the value you create in the company.
If you do the same work as a lead developer, pay yourself like a bare-bones
startup would pay a lead developer.

Web companies pay CEOs 200k because they're suckers.

------
clintavo
Thanks for all the feedback. OK further clarification: I am incorporating as
an S-Corp. Income taxes on S-corps flow through to the tax returns of the
owners. No taxes are paid at the corporate level.

The IRS doesn't care about the $1 salaries of public CEOs (yes I know
apostrophe S isn't plural, it was a typo) because those are C-Corps. C Corps
DO pay taxes at the corporate level so the IRS doesn't care what your
compensation is on a C-Corp - they've already collected taxes.

I'm sorry I wasn't clear in my first post, I was NOT thinking of a $1 salary
or anything like that to avoid taxes. I'm thinking in the $75K - $150K range
but that's just a gut feeling that I'm looking to confirm with some kind of
data source in case I have to justify it to IRS. My CPA is helpful, but he
can't give me a total answer because he's not in the internet/web business...I
am, hence the reason I posed the question on Hacker News.

I do however want to minimize my salary to a REASONABLE level as I don't want
to overpay FICA (which caps out at 102K, but several CPAs I've spoken with
feel Obama will eliminate that cap), plus I don't want to pay Medicare (3.9%)
on ALL of the income the corporation generates - only on the portion
reasonably attributable to my salary.

I was hoping some of the early stage YC companies or other CEOS/Developers who
frequent Hacker News would have some guidance and/or a source for some general
ranges of salaries for CEOs of web companies.

Thanks again for all your help.

------
mdasen
I think that $75k would be reasonable. That's on the low side (25th
percentile), but reasonable. Below $50k and I'd say you're begging to be
audited. But I don't do this for a living or anything.

Really, your CPA and lawyer should be able to give you an exact figure. That's
their business. It's a little odd to ask for that advice here when you are
already paying professionals in the field for that advice. Your CPA/lawyer
should have experience with what is safe. Use it.

------
sokoloff
As a matter of practicality, any number in the $80K+ range will be fine,
though you may feel better about paying yourself $100K given that the spread
in taxes is under $1K/year (from 80->100). You can go below "normal"; you just
can't go below "reasonable". I'd also set the comparable position as "web
developer", not "CEO", as you can make a strong case that your primary
function day-to-day is more akin to web-dev than to captain-of-industry.

Another important thing to keep in mind, depending on your forecast need for
credit: you may find it easier to qualify for a mortgage, to refinance, etc,
if you have a higher base salary. Any amount by which you can get more
favorable terms on a mortgage will likely BURY that $1K/yr in taxes. Sure you
can substantiate with 2 years of tax returns, etc, etc, but that's going to
invite human scrutiny, and in the current credit situation, I'd want to have
the skids as greased as possible to have my application "look normal".

------
amobilebiz
Disclaimer: I am not an accountant or attorney so take this how you will.

My understanding of the law from our accountants and attorneys is that you do
not have to pay yourself anything if you don't want to. BUT...if you do decide
to pay yourself, the salary must be "reasonable and comparable" to salaries of
persons with similar job descriptions and titles. In other words, if your
company takes in $1M in revenues a year and you pay yourself a $500K salary it
may raise a red-flag. On the other hand, if you pay yourself $1 it may also
raise a red-flag. My advice is to pay yourself what you feel you are worth and
the company can afford to pay you, but don't be greedy. You can always give
yourself an end-of-year bonus. The point of the law is to keep you from
operating the company for a profit, writing off all your expenses as business
expenses and claiming on your personal taxes that you did not earn an income
while the company cut you checks out of the "owner draw" account. Depending on
size and revenues of your company you can always claim an S-Corp exemption and
just flow through the profits/losses to your personal taxes thus alleviating a
lot of this for you.

Again, I am not an attorney or accountant so I would definitely double check
everything.

------
wmorein
Do you really have to pay yourself "reasonable" compensation? I don't doubt
that you were told that, but it is interesting that multiple CEOs of large,
public companies (e.g. Brin/Schmidt/Page at Google, Jobs at Apple) pay
themselves $1 per year.

See proxy statements at <http://edgarest.com/company/name/1288776/Google_Inc_>
and <http://edgarest.com/company/name/320193/APPLE_INC> for reference.

~~~
prospero
That's because those companies are large and public, and the equity they have
in the company makes an annual salary unnecessary.

I don't see how that applies in this situation.

~~~
wmorein
In Jobs's specific case, for a while he held no equity and also drew no
salary.

------
delano
Shouldn't you be asking your CPA and your lawyer what "reasonable" means in
this case?

------
vaksel
isn't the "reasonable" compensation more about the max you can pay yourself,
not the min? So that you can't set your salary at whatever your profit is, in
order to avoid paying business taxes.

------
stcredzero
Apostrophe-S is not a plural!

------
trevelyan
Don't incorporate in the United States? Does the law still apply?

