Reasonable Comp Documentation: RCReports, BLS, and Survey-Based Methods Compared

#Why documentation matters more than the number itself

The IRS reasonable compensation examination does not ask “what’s the right number.” It asks a different question. How did you decide on this number? Can you show your work? Two owners can have identical $90K salaries, and still get totally different audit outcomes. One wins, because the $90K is backed by a written memo citing BLS data, comparable-role analysis, and the nine-factor framework. The other loses, because the $90K was just a number their CPA mentioned over the phone three years ago.

A written memo helps you show how you set the pay. It does not make the number safe. The number still has to be reasonable for the work done.

Look. Most owners we onboard for cleanup work have a reasonable comp number that’s actually within a defensible range. What they’re missing is the paper trail. We spend the first month of every S-corp engagement building the documentation. The number usually does not change. But audit defense requires the memo.

#The three methods at a glance

Before the detail, here is how the three legitimate methods stack up on the two things that matter most: what they cost and how well they hold up at audit.

The rest of this guide walks each method in depth. Then it covers the layered package we actually use, the memo template, and what happens when the memo is missing.

#Method 1: Bureau of Labor Statistics (BLS) Occupational Employment Statistics

#What it is

The BLS publishes the Occupational Employment and Wage Statistics (OEWS, formerly OES) program: a comprehensive dataset of US wage data by occupation, geography (state, metro area, or non-metro area), and percentile (10th, 25th, median, 75th, 90th). Updated annually. Free at bls.gov/oes.

#What it provides

For any defined occupation (e.g., “Physicians and Surgeons, General Internal Medicine” or “Real Estate Sales Agents”), you can pull:

• National median wage
• State median wage
• Metropolitan area median wage (for many metros)
• Wage percentiles at each geographic level
• Employment counts (sometimes useful for context)

For a solo internal medicine physician contractor in San Antonio (Bexar County), the 2025 BLS data shows:

• National median wage: $256,560 (BLS OEWS, SOC 29-1216 General Internal Medicine Physicians, May 2025 release)
• Texas median: $269,110 (BLS OEWS, May 2025)
• San Antonio-New Braunfels metro: check the current BLS OEWS metro table at bls.gov/oes, since metro figures for this occupation are not always published
• National 25th percentile: $124,470; national 75th percentile: $374,850 (BLS OEWS, May 2025). BLS does not publish a 25th/75th percentile breakout for every metro, including San Antonio. Check the current tables at bls.gov/oes for your own state and metro before you rely on a percentile figure.

These numbers represent total annual wages for employed physicians in the role. For a solo S-corp owner doing the same work, BLS provides the floor: at minimum, comp should be in the range of similar employed practitioners adjusted for facts like hours worked, business ownership burden, etc.

#Strengths

• Free. No subscription cost.
• Comprehensive. Covers essentially every legitimate occupation in the US.
• Geographic granularity. Metro-area data for most major MSAs.
• Updated annually. Current data reflects market conditions.
• Government source. BLS data is a public source that courts and preparers use as a starting point. The IRS does not name a required source.

#Weaknesses

• Generic categorization. “Physicians and Surgeons, General Internal Medicine” doesn’t distinguish between a primary-care contractor, a hospitalist, and a concierge medicine practice owner. Adjustments needed.
• Employee wage data, not owner-operator data. BLS measures W-2 wages of employed practitioners: not the total comp of practice owners (which often includes profit-sharing, equity, distributions). For S-corp owner comp, BLS is the floor, not the ceiling.
• No business-size adjustment. A median wage for the metro does not tell solo practitioners apart from large group practices.
• No facts-and-circumstances customization. Pulling BLS data doesn’t apply any of the nine IRS factors. You have to do that analysis separately.

#When BLS alone is sufficient

For clean cases: common occupations, mid-range income levels, single role, BLS data plus a written memo applying the nine factors is often enough. Examples:

• Solo 1099 IT consultant making $150K, claiming $90K reasonable comp
• Real estate agent making $200K, claiming $100K reasonable comp
• Solo dentist making $300K, claiming $145K reasonable comp

An owner’s pay must be at a level that comparable businesses would pay for the same work. These percentages are not a legal safe harbor for every business.

#When BLS alone is insufficient

For higher-stakes situations, BLS becomes the floor and additional sources are layered on:

• Income above $500K where the savings dollar is large
• Specialty practices not well-represented in BLS categories
• Multi-role owners (operator + sales + management)
• Industries with significant variance between employed and owner-operator comp (medicine, dentistry, law)
• Prior IRS examinations or high audit risk

#Method 2: Industry-specific compensation surveys

#What it is

Trade associations and industry research organizations publish detailed compensation surveys for their professions. Common ones:

• ADA Survey of Dental Practice: comprehensive dentist comp data
• AICPA Management of an Accounting Practice (MAP) Survey: CPA firm owner data
• MGMA Provider Compensation and Production Survey: physician practice data
• NAR Member Profile: real estate agent comp
• AAA salary surveys: various specialty associations
• Robert Half Salary Guides: broader white-collar professional data
• Mercer / Aon / Willis Towers Watson: executive comp data for larger businesses

#What it provides

Survey data is typically more granular than BLS:

• Comp by practice size (solo vs. small group vs. large group)
• Comp by years of experience
• Comp by specialty within an occupation
• Comp by geographic region (sometimes state, sometimes metro)
• Total comp including bonus, distributions, equity (when applicable)

For a solo dentist in San Antonio, the ADA Survey provides comp data for solo general dentists in Texas. It breaks this down by years of experience, practice production, and metro size. The data captures practice owner comp specifically, including profit distributions, not just employed dentist wages.

#Cost

• Trade association surveys: $200–$1,500 per report. Sometimes free for association members.
• Commercial executive comp surveys: $1,000–$5,000+ per report
• MGMA, AICPA, ADA: typically $400–$1,500 for the relevant module

#Strengths

• Industry-specific granularity that BLS lacks
• Owner-operator comp captured (not just employed wages)
• Practice-size adjustment built into the data
• Credible to IRS when from recognized industry sources

#Weaknesses

• Cost: meaningful annual expense if updated yearly
• Sample size limitations for niche specialties or smaller geographies
• Lag: surveys often reflect prior-year data
• Methodology variance: different surveys define comp differently

#When industry surveys are worth the cost

The ROI on a $500–$1,500 survey purchase is simple. Say a survey supports a lower pay figure than the general BLS number, by $5,000 to $15,000. You may save 15.3% payroll tax on that gap, or $765 to $2,295 a year. This holds only up to the Social Security wage limit, and only if the lower number holds up. Payback usually comes within one year for most practices.

For solo practitioners in well-represented industries (dentistry, medicine, accounting, law, real estate), industry surveys are nearly always worth the investment.

#Method 3: RCReports and equivalent commercial services

#What they are

RCReports (rcreports.com) is one widely used commercial reasonable-compensation service for S-corp owners. It blends BLS data, industry surveys, geographic cost-of-living adjustments, role-weighting analysis, and the IRS nine-factor framework into a single bound report. Output is a 15–25 page PDF labeled with the date, methodology, sources, and conclusions.

Similar services exist (Salary.com Pro, PayScale Business, certain Wolters Kluwer products) but RCReports is the most-cited in S-corp practice.

#What you get

Per analysis:

• Custom report tailored to entity, owner, role, location, hours, business size
• Multi-source data blend (BLS + industry surveys + geographic adjustments)
• Three-method analysis: Market Approach (BLS-based), Income Approach (Elliotts independent-investor), Cost Approach (replacement cost of services)
• Audit-defense narrative explaining the methodology
• Conclusion: defensible reasonable comp range
• Signed by the preparer (the CPA or the owner)

#Cost

• RCReports subscriptions: $300–$1,500/yr depending on tier and volume
• Per-report cost (à la carte): use the current RCReports pricing, dated. As of October 2026 it lists $499 for one report, or a yearly plan for 10 reports at a list price of $1,500.
• Annual updates: included in subscription, additional cost à la carte

For preparers handling 10+ S-corp clients, the subscription pays for itself in efficiency and consistency. For owners handling their own, per-report pricing is the entry point.

#Strengths

• Three-method synthesis is more defensible than any single method
• Audit-defense narrative included in the report
• Bound, dated, signed document that’s audit-ready out of the box
• Update path for annual re-benchmarking
• Recognized by IRS examiners as a legitimate methodology

#Weaknesses

• Cost. Real annual expense for owners not handling multiple S-corps.
• Black-box methodology in some ways. You trust the service’s data sources and weighting.
• Generic role descriptions sometimes don’t capture custom situations (multi-role owners, hybrid businesses).
• Still requires a memo signed by the owner. The RCReports document alone is not the operational documentation.

#When RCReports is the right call

For most S-corp engagements where the savings dollar exceeds $10K/yr, RCReports is worth the cost. The audit defense package is the cleanest single-source documentation available short of a custom valuation. We use RCReports as the default for ETS S-corp clients and supplement with industry surveys for specialized practices.

For very-low-stakes situations ($60K–$80K net income, marginal S-corp savings), the cost may not be justified. A BLS-based memo is sufficient.

#The combined approach we use at ETS

For most S-corp engagements, our standard documentation package layers all three methods:

1. BLS as the floor. Pull the relevant occupation + metro data. Document the median, 25th, and 75th percentiles. This is the IRS-accepted baseline.
2. Industry survey for practice-specific adjustment. If the client’s industry has a recognized survey, pull the relevant comp band for the role + practice size + experience level.
3. RCReports for the synthesized analysis. Generate a custom report blending the data, applying the nine factors, producing the defensible range.
4. Written memo signed by the owner before the first paycheck runs. The memo references all three sources, explains the chosen number within the range, and authorizes the payroll setup.

Cost for a single client: $250–$600 (RCReports per-report) + $0–$1,500 (industry survey, if applicable). Total documentation cost typically $250–$1,800, small relative to the multi-year tax savings on a properly-structured S-corp.

#The reasonable comp memo template

The memo doesn’t need to be long. A 1–2 page document signed and dated by the owner-shareholder is sufficient. Required elements:

REASONABLE COMPENSATION DETERMINATION MEMORANDUM

Date: [Date memo prepared]
Entity: [Legal entity name], an S-corporation
EIN: [EIN]
Shareholder-Employee: [Owner name]
Role: [Job title and brief role description]
Effective Date of Compensation: [Start date for the new comp level]

1. ROLE DESCRIPTION
[Describe the owner's responsibilities, hours per week, breadth of role,
specific functions performed. Note credentials, years of experience,
specialty designation, geography. Reference resume/CV in entity files.]

2. BUSINESS CONTEXT
[Describe the business: revenue, profit margin, employee count, business
activities, complexity factors. Reference multi-year P&L summary.]

3. BENCHMARK ANALYSIS
The reasonable compensation determination relied on the following sources:

  3a. Bureau of Labor Statistics OEWS Data
      Occupation: [Occupation code and title]
      Geography: [Metro area or state]
      Median annual wage: $X
      25th percentile: $X
      75th percentile: $X
      Source date: [BLS publication date]

  3b. [Industry Survey Name] [Year]
      Practice type: [Solo, group, etc.]
      Owner comp median: $X
      Adjustment factors applied: [list]

  3c. RCReports Analysis (or equivalent)
      Methodology: Three-method blend (Market, Income, Cost approaches)
      Defensible range: $X to $Y
      Recommended midpoint: $Z
      Report date: [Date]
      Report reference: [File name in records]

4. NINE-FACTOR ANALYSIS
Applying Treas. Reg. §1.162-7(b)(3) and the case law standards (Watson,
Glass Blocks, McAlary, Elliotts):

  Factor 1 (Role/Duties): [Brief]
  Factor 2 (Background/Experience): [Brief]
  Factor 3 (Business Size/Complexity): [Brief]
  Factor 4 (Economic Performance): [Brief]
  Factor 5 (Internal Comp Comparison): [Brief]
  Factor 6 (External Benchmark): [Reference §3 above]
  Factor 7 (Comp History): [Brief]
  Factor 8 (Distribution Pattern): [Planned policy]
  Factor 9 (Independent Investor Test): [ROE calculation]

5. DETERMINATION
Based on the above analysis, reasonable compensation for the
shareholder-employee is set at $[AMOUNT] annually, paid via regular payroll
on a [monthly/semi-monthly] basis. This compensation will be re-benchmarked
annually as part of year-end planning.

6. PAYROLL SETUP
Payroll processing via: [Gusto/ADP/etc.]
First paycheck date: [Date]
Pay frequency: [Monthly/semi-monthly]
Annual gross wages: $[AMOUNT]

7. AUTHORIZATIONS
This memo authorizes [entity name] to commence payroll for the
shareholder-employee at the above compensation level effective [date].
The shareholder-employee acknowledges that the compensation has been
benchmarked and documented per IRS standards.

Signed: ________________________________ Date: _____________
        [Owner name], as Shareholder
                 and as Officer of [Entity]

The signed memo lives in the entity’s permanent records (Basecamp Permanent → Formation Documents or equivalent). The RCReports PDF, BLS data printouts, and industry survey excerpts are attached as supporting exhibits.

#What happens if the memo is missing at audit

The most common cleanup case we see: client’s prior preparer set a reasonable comp number 3 years ago without any written documentation. Now the IRS is asking how the number was determined. The conversation goes:

IRS: Please provide documentation supporting the reasonable compensation determination. Client: My CPA recommended this number. IRS: Please provide the CPA’s analysis. Client: It was discussed verbally.

If you have no memo, you have to prove the pay is reasonable using whatever evidence you have. The IRS will then build its own number. A memo made at the time makes that proof easier. The corporation has no defense beyond that evidence. The reclassification proposal usually moves forward.

If no memo exists, write one now and date it today. Say it was prepared later and explain how the pay was set at the time. Never date it back. We do this in defense cases when there is no other option. But the IRS-friendly result is contemporaneous: done before the comp was set, signed before the first paycheck ran.

#Common questions

Do I need a new memo every year? Annual re-benchmarking is best practice. A new memo each January, as part of year-ahead planning, reflects current data and any role or business changes. Say the comp number stays the same year over year and circumstances have not really changed. A brief addendum to the prior memo is enough. But something dated in the current year should still exist.

Can I use a memo my CPA writes for me? Yes, but the owner-shareholder should still sign acknowledging the determination. The memo represents the owner’s reasonable-comp setting, not just the CPA’s recommendation.

What if I disagree with the RCReports number? The RCReports output is a range, not a single number. You can set comp anywhere in the defensible range based on facts and circumstances. Going significantly outside the range without additional justification weakens the position.

Does the memo need to be filed with the IRS? No. It lives in your business records and is produced if the IRS examines reasonable compensation. No proactive filing.

Can I use a competitor’s salary data as benchmark? Competitor data is not a standard methodology. It carries weaker audit weight than published BLS or survey data. Anecdotal references can add to, but not replace, formal sources.

How does the documentation interact with payroll setup in Gusto? The reasonable comp number from the memo becomes the annual gross wages set up in Gusto. The pay frequency (monthly, semi-monthly) determines how the annual amount is divided. See the Gusto setup walkthrough for the operational setup.

What if my comp needs to change mid-year? Document the change with a memo addendum explaining the circumstances (revenue change, role change, etc.). Update payroll in Gusto effective the change date. The annual W-2 will reflect the blended actual wages.

Does RCReports work for businesses with multiple owners? Yes: each owner gets a separate analysis if they perform different roles or have different reasonable comp profiles. For 50/50 owners doing identical work, a single analysis can support both.

What if I’m in an industry RCReports doesn’t cover well? Fall back to BLS plus industry survey plus custom analysis. The memo carries more of the load when commercial services do not fit cleanly. We’ve handled this for niche specialties (specialty consulting, regulated industries, hybrid businesses) by building custom analyses with multi-source benchmarks.

How do I document hours worked for the role description? Approximate weekly hours across functions is sufficient. The IRS doesn’t require formal timesheets. Reasonable estimates based on calendar, work patterns, and client/customer interaction frequency are accepted.

---

Say you’re running an S-corp without contemporaneous reasonable comp documentation, or with documentation that does not cite a recognized methodology. The Discovery call is where we fix it. We pull the benchmarks, build the memo, file it in your permanent records, and update Gusto so the documented number drives the actual payroll. My pleasure to walk you through your specific situation. Free advice either way.