What is considered “Reasonable Compensation”?

Reasonable Compensation is a U.S. tax concept that applies especially to shareholder-employees of S-Corporations. This refers to the salary that an owner who performs services for the business should be paid before taking profit distributions. This amount reflects what someone else would ordinarily earn for similar work under similar circumstances.

Why it matters..

One of the biggest tax advantages of an S Corporation is that business profits distributed to shareholders generally are not subject to Social Security and Medicare payroll taxes. Because of that, the IRS requires owners who actively work in the business to first receive reasonable wages for those services.

If compensation is set lower than usual while large distributions are taken, the IRS may classify some distributions as wages and assess additional payroll taxes, interest, and penalties.

To read more into this subject... https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself#7