Why BLS Data Isn’t Enough

BLS Data Is a Starting Point and Not a Defensible Reasonable Compensation Conclusion

One of the most common mistakes I see in Reasonable Compensation analyses is the assumption that a Bureau of Labor Statistics (BLS) wage figure is sufficient to support an S corporation shareholder’s salary. A practitioner identifies a job title, finds a wage estimate, applies a percentile, and concludes the analysis is complete.

Unfortunately, that approach falls short of the standard the IRS actually requires.

The starting point for any Reasonable Compensation analysis should be the IRS definition itself. According to IRS Fact Sheet FS-2008-25, Reasonable Compensation is “the value that would ordinarily be paid for like services by like enterprises under like circumstances.” That definition is important because it establishes that Reasonable Compensation is not simply about finding a wage number. It is about determining what a specific individual would be paid for the services they perform in a business that is comparable in all relevant respects.

BLS data can be a useful input in that process, but it is not designed to answer that question on its own.

To be clear, BLS data is credible, objective, and widely respected. It provides valuable occupational wage information across hundreds of job categories and geographic regions. For practitioners looking for an initial benchmark, it can be a logical starting point. The problem arises when that benchmark becomes the entire analysis.

The IRS does not determine Reasonable Compensation using a single data point. IRS guidance identifies numerous factors that should be considered, including training and experience, duties and responsibilities, time and effort devoted to the business, compensation paid to non-shareholder employees, distribution history, bonus practices, and comparable compensation for similar services. A BLS wage figure addresses only a small portion of those considerations.

There is another challenge that receives far less attention: the lack of truly local, industry-specific compensation data within the BLS framework.

In many markets, practitioners quickly discover that the occupation and industry combination they need simply does not exist at the local level. The result is often a reliance on state-wide averages or, in some cases, national compensation data. While those figures may be statistically valid, they create a significant problem when viewed through the lens of the IRS definition.

If Reasonable Compensation is supposed to reflect what would be paid for like services by like enterprises under like circumstances, how can a state-wide or national average reliably satisfy that requirement?

A specialized engineering firm in Denver is not necessarily comparable to every engineering firm in Colorado. A regional healthcare practice in a rural community may operatein a completely different labor market than a large metropolitan practice in the same state. Likewise, a niche construction company may face compensation pressures that differ dramatically from national averages. When local industry-specific data is unavailable, practitioners are often forced to broaden the comparison group, moving further away from the “like enterprises” and “like circumstances” standards established by the IRS.

The BLS limitations become even more pronounced when analyzing shareholder employees in closely held businesses.

Most S corporation owners do not wear a single hat. They may simultaneously function as CEO, salesperson, operations manager, service provider, human resources director, and chief financial officer. A BLS wage estimate tied to a single occupational classification rarely captures that reality. 

For example, an owner who spends part of their time delivering services, part of their time generating revenue, and part of their time managing employees cannot reasonably be compared to a single occupational category. The value of their contribution is often a blend of multiple roles, each carrying different market compensation characteristics. 

This is why valuation professionals, courts, and IRS examiners generally look beyond a single wage survey. Defensible Reasonable Compensation analyses typically evaluate the shareholder’s actual duties, time allocation, qualifications, industry, geographic market, company size, profitability, and overall economic circumstances. Market compensation data remains important, but it is only one component of a broader analysis. 

For CPAs and tax advisors, the practical takeaway is straightforward: document the facts before selecting the wage. 

Start by understanding exactly what services the shareholder performs. Evaluate how much time is devoted to each responsibility. Consider the company’s size, complexity, profitability, location, and workforce. Then identify appropriate compensation data and explain why those comparables are relevant. Most importantly, document the reasoning that connects the compensation conclusion to the specific facts of the engagement.

BLS data should be viewed as a reference point, not a conclusion.

A BLS printout may help support a Reasonable Compensation determination, but it cannot establish one by itself. The IRS standard requires practitioners to determine what would be paid for like services by like enterprises under like circumstances. That requires more than a wage lookup. It requires a thoughtful analysis that connects market data to the real-world facts of the shareholder, the business, and the environment in which both operate. 

In Reasonable Compensation, defensibility does not come from finding a number. It comes from being able to explain why that number reflects the facts.