Comment by jkaplowitz

My understanding is that the IRS attitude toward this depends on the exact tax status of your small business. The approach you describe reflects an S corporation, which is nowhere near always the right choice for every small business that sends their children to MIT: as one counterexample, if the parents' business is in NYC, the city's General Corporation Tax (which applies to S corporations) is often more punishing than its Unincorporated Business Tax, and therefore many NYC small businesses organize as LLCs not taxed as a corporation if they even choose to create a separate legal entity at all.

For every type of business entity other than an S corp or an LLC electing to be taxed as one, the IRS either doesn't care about any notion of reasonable salary or - in the case of a C corp or an LLC electing to be taxed as one - actually wants it to be as low as possible (whereas the owner wants to maximize it).