The Problem
The IRS requires S corporation shareholder-employees to pay themselves reasonable compensation for services, including time and effort devoted to the business. When the business could not afford full pay in lean years, and later wants to catch that up as compensation, the IRS Reasonable Compensation Job Aid (section 6) says three things are generally required.
- You must establish the fact of the prior under-compensation.
- There must be a record of the contemporaneous intent to compensate for that under-compensation in future years.
- The specific amount of the identified under-compensation must be stated.
What the system will be
Daily records by person: salaried and non-salaried hours, a calculated total, an open category (Marketing, Deployment, a project number — whatever names the work without a rigid task system), and detailed notes. We will work with project tools but not depend on a tight integration. Categories can be made up.
Weekly timesheet
Alex Rivera
$20.00 / hr
Mar 2 – Mar 8, 2026
| Day | SalariedEnter into payroll | Non-salariedprior-year under-compensation | Total | Category | NotesInternal only — never exported | |
|---|---|---|---|---|---|---|
| MonMar 2 | 8.0 | 2.0 | 10.0 | Deployment | Client delivery, infra follow-ups | |
| TueMar 3 | 8.0 | 1.5 | 9.5 | Development | Architecture review, vendor calls | |
| WedMar 4 | 8.0 | 0.0 | 8.0 | PROJ-1842 | Implementation day | |
| ThuMar 5 | 8.0 | 3.0 | 11.0 | Bug Fix | Deploy window, after-hours support | |
| FriMar 6 | 8.0 | 0.0 | 8.0 | Marketing | Planning and wrap-up | |
| SatMar 7 | 0.0 | 4.0 | 4.0 | Networking | Weekend catch-up on backlog | |
| SunMar 8 | 0.0 | 0.0 | 0.0 | — | — | |
| Week total | 40.0 | 10.5 | 50.5 | 40.0 salaried · 10.5 non-salaried |
← Week of Mar 2 – Mar 8, 2026
Day entry
Thursday, Mar 5, 2026
Alex Rivera
Salaried
Enter into payroll
Non-salaried
prior-year under-compensation
Total
Calculated — not editable
11.0
Category
Open label or external task / project #
Notes
Internal only — never exported. Extra detail belongs here; elsewhere it gets squashed.
Categories travel with the export. Notes may contain trade secrets and stay internal — they never go in the exported document.
Why Simple Daily Records?
Detailed records belong to scheduling and project management, not salary or prior-year under-compensation. In David E. Watson, P.C. v. United States, the court's analysis leaned on a "roughly" 35-45 hour work week, plus qualifications and comparables. Not a punch log of each day. Simple daily totals are enough to support that kind of picture. The IRS job aid asks for "contemporaneous" records. That means made at the time, not rebuilt later. Trust comes from logging daily, closing the period, and exporting the trail outside the system. Further trust is built by corroborating those records with real work.
Closing the period
Submitting the timesheet puts the period into a pending review status, signaling that it is ready for payroll review. Once payroll runs, a link to the paystub goes on the record. That paystub carries IDs that can be looked up later. When the period is closed, an email is sent with an attached PDF so the record can be stored and timestamped in a 3rd party system, an email server. The PDF implies immutability, durable enough for honest people intending to transmit the information genuinely. The paystub link makes the record hard to fake for bad actors, and easy to corroborate against what is now an official payroll record.
What you have then is a system that can track non-salaried hours worked, and tie them to official government payroll records. Salaried time is corroborated. Non-salaried time rides alongside it in the same contemporaneous trail.
Closed-period PDF export
period-2026-07-27-to-2026-08-02-alex-rivera.pdf
Primordial Software LLC
Time & Effort Records
DOC-2026-0819-9001
Generated Aug 19, 2026 6:31:05 PM
Time & Effort Export
Person
Alex Rivera
Status
Payroll Processed
Period
Jul 27 – Aug 2
Payroll Reference
https://qbo.intuit.com/app/paycheckDetails?paycheckId=1234
| Day | Salaried | Non-salaried | Total | Category |
|---|---|---|---|---|
| MonJul 27 | 8.0 | 2.0 | 10.0 | Campaign Management |
| TueJul 28 | 8.0 | 1.5 | 9.5 | Development |
| WedJul 29 | 8.0 | 0.0 | 8.0 | PROJ-1842 |
| ThuJul 30 | 8.0 | 3.0 | 11.0 | Bug Fix |
| FriJul 31 | 8.0 | 0.0 | 8.0 | Marketing |
| SatAug 1 | 0.0 | 4.0 | 4.0 | Networking |
| SunAug 2 | 0.0 | 0.0 | 0.0 | — |
| Period total | 40.0 | 10.5 | 50.5 | 40.0 salaried · 10.5 non-salaried |
Reference rate
$20.00 / hr
Salaried payout
40.0 hrs · $800.00
Non-salaried shortfall
10.5 hrs · $210.00
Salaried hours and the salaried payout shown above are for reference only. The payroll system is the authoritative system of record for amounts paid. Non-salaried hours recorded here represent under-compensation for services rendered. Primordial Software LLC intends to pay equivalent amounts as wages in future periods when cash flow and reasonable-compensation review allow. Amounts are forfeited if employment ends before payment.
Thank you for your hard work.
Timothy Gonzalez
Timothy Gonzalez
Managing Member, Primordial Software LLC
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Alone, the PDF is just a document. What makes it useful is that it is contemporaneous, closed with payroll, and timestamped outside the system. Each person can treat it as an index to corroborate their tangible work. The document acts as a tool later to decide whether to take money out of the business, to support a valuation or a sale, or simply to know how hard to negotiate for fair compensation.