Maximum Reasonable Compensation Law Law and Legal Definition

Maximum reasonable compensation is a standard used by the Internal Revenue Service (IRS) for the total compensation package, including bonuses and benefits. IRS regulations define ''reasonable'' as the amount that would ordinarily be paid for like services by similar or comparable employers.

Closely held regular corporations are the typical targets of IRS reasonable compensation challenges. Although it depends on the type of corporation involved, there is often a taxation motivation to draw unreasonably low or unreasonably high compensation in order to minimize taxes. This has led the IRS to develop and define the concept of reasonable compensation. Tax regulations exist to examine unreasonable executive compensation for a:

  • stockholder-employee
  • person who owns all or most of the corporation's stock
  • other members of the primary stockholder's family