Get expert tax and accounting help!
Call (866) 681-2140
Call (866) 681-2140
As an S Corp owner, the salary you pay yourself is not a number you get to pick freely. Pay too little and the IRS can recharacterize your distributions as wages, plus penalties. Pay too much and you hand back the savings. The job is finding the figure that is both defensible and efficient.
The IRS says payments to a shareholder who provides services must be treated as wages to the extent they are reasonable compensation for that work. An officer who does more than minor work for the company is an employee, and the company owes employment taxes on that pay. The distributions you take on top are fine — but only after the salary is real.
There is no fixed percentage in the law. The IRS weighs the facts, and the more the company's income traces back to your personal work, the higher the salary needs to be.
Four factors the IRS weighs. None are fixed percentages — all are judgment calls we document:
Your duties, hours, and responsibility. A working owner-CEO commands a different figure than a passive owner. What you actually do drives the baseline.
Your training, experience, and what comparable roles pay in your industry and region. Public salary data, BLS wage tables, and industry benchmarks all matter here.
What the company pays non-owner staff for similar work. If your senior developer earns $180K and you pay yourself $40K as CTO, that's a red flag by itself.
How much of the company's revenue comes from <a href="https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues" target="_blank" rel="noopener nofollow">your work versus equipment, capital, and other employees</a>. A one-person consulting practice = mostly you. An equipment-heavy operation = mostly capital.
We document what you actually do, your hours, and where the company's income comes from — because that is what a reasonable figure is built on.
We compare against real compensation data for your role, industry, and region — so the number has support behind it rather than a round guess.
We keep the reasoning on file so if the salary is ever questioned, the answer is already written down. A short defensible memo beats a scramble later.
Owners come to us either to set this from the start or to fix a number they suspect is too aggressive. Both work.
Cost depends on whether we are setting compensation for one owner or several, how much benchmarking your role needs, and whether we are also handling payroll and the S Corp return. We quote after a short look at your role and the business.
Because we work your business and personal returns together, the number we set accounts for how the salary interacts with your qualified business income deduction, your retirement plan contribution room, and how health coverage for a more-than-2% shareholder is handled. A payroll service that only knows the salary cannot do that.
A common move is to pay a small salary and run most of the profit out as distributions. It does not survive scrutiny. In the well-known Watson v. U.S. case, a CPA paid himself a $24,000 salary while taking far larger distributions. The courts treated a large share of those distributions as wages, and the back employment tax followed.
Calling a payment a distribution does not make it one if it was really pay for your work. When the salary is set too low, the IRS can adjust both the company and the owner's returns to move that money back into wages.
Sources: IRS S-Corporation Compensation and Medical Insurance Issues; Watson v. United States
A good fit if:
If you cannot explain the salary in one sentence tied to your actual role, it is the kind of number the IRS reclassifies. If you're still deciding on the S-corp election itself, see LLC taxed as S-corp or Convert LLC to S-corp.
Tell us your role, your hours, and roughly what the business earns, and we will set a salary that holds up and leaves the distribution intact.
"If you have a tax question, whatever the least appealing answer would be, that's probably the right answer."
— George Dimov, CPA, Founder of Dimov Tax
Defensible in one sentence. Support kept on file, so a question later is a quick answer, not a scramble.
