Reasonable compensation cannot exceed the money received by a shareholder in connection with direct or indirect business involvement. The IRS determines a shareholder's affiliation by matching specific job functions to one of three major inflow sources. The first important source is the services performed by the shareholder (i.e. administrative tasks and daily business tasks) for which compensation needs to be awarded from the distributed profits. The second and third major sources include profits captured by non-shareholder employees, as well as equipment and capital added to the business. Profits distributed from these sources are created indirectly within the company and must be distributed as compensation and dividends (S Corporation Compensation and Medical Insurance Issues