How is reasonable compensation determined?

It is based on what a business would have to pay an unrelated person to perform the same duties, considering hours worked, industry norms, and comparable wage data. We document this analysis each year so the figure has a defensible basis if it is ever questioned.

What can accidentally terminate an S election?

Common triggers include issuing a second class of stock, adding a shareholder who is not an eligible individual or trust, or exceeding one hundred shareholders. We review any ownership or stock change in advance specifically to prevent this.

Is an S election always the right choice?

No, it depends on your profit level, since the self-employment tax savings need to outweigh the added cost of payroll and a separate corporate return. We run this comparison as part of our annual review so you know it is still the right fit.

What happens if our election was accidentally terminated?

We can often file for retroactive relief with the IRS if the termination was inadvertent and corrective steps are taken promptly. This requires a formal request and supporting documentation, which we prepare and submit on your behalf.

Business Tax Services

S Corporation Tax Services in Clovis, CA

Form 1120-S preparation, an owner salary number that holds up, and election upkeep for HVAC, plumbing, electrical, and mechanical shops running through ServiceTitan or Housecall Pro.

Built for HVAC, plumbing, electrical, and mechanical contractors running trucks, techs, and service agreements out of QuickBooks Online, ServiceTitan, and Housecall Pro.

Schedule Your Free Strategy Call (559) 203-3450

What sends contractors looking for this

The owner is paying himself almost nothing and pulling the rest out as distributions

An S corp only saves payroll tax on the part of profit that gets paid out as a distribution instead of a salary. Reasonable compensation is the IRS term for the salary piece, and it just means a number close to what you would actually have to pay someone else to run the shop, dispatch the crews, and do the hours the owner puts in. Plenty of owners set that number at ten or fifteen thousand dollars years ago and take everything else as a distribution, because distributions do not owe payroll tax.

That gap between a token salary and the real value of the owner's work is exactly what the IRS looks for first when it opens a file on a trades S corp, and a shop pulling six figures in distributions on a salary that low is an easy target.

If the IRS reclassifies those distributions as wages, the shop owes back payroll tax, currently around 15.3 percent, on every dollar that should have been salary going back several years, plus penalties and interest, which on a shop clearing two hundred thousand dollars a year can run well into the tens of thousands of dollars.

The owner is paying himself too much and handing back payroll tax he did not have to pay

The opposite mistake happens too. An owner who is nervous about an audit sometimes overcorrects and sets his own salary equal to nearly all of the shop's profit, running it all through payroll instead of splitting off a reasonable share as a distribution. Every dollar that goes through as salary instead of distribution gets hit with payroll tax on both the employee and employer side.

This usually happens because nobody ever ran the comparison. The owner assumes the safe move is to pay himself everything as wages, without anyone calculating what a properly supported split would actually look like.

Running an extra fifty thousand dollars a year through payroll instead of taking it as a distribution costs roughly seven to eight thousand dollars a year in payroll tax that a properly documented salary split would have avoided, money that just quietly leaves the business every year it goes uncorrected.

There is no payroll at all, just distributions whenever cash is available

Some newer S corp shops skip payroll altogether in the first year or two and just move money from the business account to the owner's personal account whenever there is cash sitting there. Without any salary run through payroll, there is nothing on record that looks like reasonable compensation at all, only distributions.

This usually happens because setting up payroll for a single owner feels like unnecessary paperwork early on, and nobody explains that the S corp election requires it from day one, not once the shop feels big enough to justify it.

With zero salary on record, the IRS can treat the entire year's distributions as wages if the election is examined, which means back payroll tax on the full amount plus penalties for every quarter no payroll was filed, often the single most expensive mistake we see in a first-year S corp.

How we fix each of those

01
A documented reasonable compensation number set before the first payroll run
Before the shop's first payroll date each year, usually January, we calculate a defensible salary figure from comparable trade wage data for the owner's actual role and hours, put it in writing in QuickBooks Online payroll, and split the remaining profit as distributions instead of guessing at a round number.
02
A mid-year check on the salary versus distribution split
Around July, once we can see actual profit from QuickBooks and job data from ServiceTitan or Housecall Pro, we check whether the salary set in January is still tracking correctly against a strong or slow year, and adjust the remaining payroll runs before December so the split stays reasonable both ways.
03
Payroll setup and correction for shops running distributions only
For an owner who has been taking distributions with no payroll on record, we set up payroll immediately, calculate a reasonable back-dated salary for the current year where possible, and file any missed quarterly payroll returns so the shop is current before year end instead of walking into an audit with zero wages on file.

Everything included

Form 1120-S preparation and filing
Shareholder K-1 preparation
Reasonable compensation study and documentation
January payroll setup for the owner's salary
Mid-year salary versus distribution check against actual profit
Correction and catch-up payroll for distribution-only shops
Distribution and basis tracking
Annual break-even review of the election

Work that pairs with this

Business Tax Preparation

Accurate, on-time federal and state returns for HVAC, plumbing, and electrical S corps and LLCs, built from books that already match your ServiceTitan or Housecall Pro job data.

View Business Tax Preparation

Business Tax Planning

Projections, S corp salary review, and December equipment decisions made while there's still time to act, not after the return is already drafted.

View Business Tax Planning

Partnership Tax

Form 1065 preparation, accurate K-1s, and buy-in accounting for two-owner shops, like a pair of electricians or plumbers who own the business together.

View Partnership Tax

Contractors who have already done this

Real Google reviews from owners we work with, next to the engagements behind the numbers.

Google review
As a home services company, I feel that High Velocity Accounting has elevated our business to the next level. We are able to dig deeper into our numbers, report accurately and make adjustments where needed. They are very responsive, detail oriented and an extension of our team.
Cathleen Helin
Owner, Home Services
Clovis, CA
Case study
How a Construction Company Cleaned Up Two Years of Books and Financed New Equipment
Construction · $2.8M - $4.1M annual revenue
Books brought current
22 months
Equipment loan approved
$680,000
Read the full breakdown
Google review
I have been so genuinely pleased with High Velocity Accounting's services. I feel I have an extension of our team in Brett and his team. They always make time for my questions and look for strategic ways to build our businesses mutually. I rest easy knowing our books are kept in good order and our taxes are prepared professionally. I never hesitate to recommend this firm to any service business owners looking for professional book keeping and tax services.
Texas Medley
Owner, Service Contracting
Clovis, CA
Google review
We have been using High Velocity Accounting for a couple years now and are so thankful for their service! They are meticulous, thorough, dependable and always ready to deal with a curveball. Kind, patient, gracious. Thank you for your service and the relationship we've developed together.
Grant Schoenberger
Client, Trades
Clovis, CA
Google review
Brett Neal has been our family's accountant for over six years now, because he is the most dependable professional in this business. We started with Brett as two separate single-filers with simple W-2's and quickly graduated to a married couple having multiple types of complicated business/tax filings. Brett took every shift in stride; every transition has been carried out smoothly and without any hiccups. Trust that this is the guy for all your filing, bookkeeping, and financial consulting needs.
Alyssa Cotrina
Business Owner, Trades
Clovis, CA

Where we do this work

Our office is in Clovis and we work with home services contractors across the Central Valley and nationwide. Pick your city to see how s corporation tax works for shops in that market.

Not on the list? We run every engagement over QuickBooks Online, ServiceTitan, and Housecall Pro, so distance does not change the work. Call (559) 203-3450.

Talk to a CPA who will actually pick up the phone

Start with a 30-minute consultation at no cost. You will leave it knowing what the work involves, what it costs, and what happens next.