Hi,
Most S-Corp owners set their salary once and never look at it again. That’s a problem, because a salary that’s too low invites an IRS audit, and a salary that’s too high means you’re overpaying payroll tax every single paycheck. Either way, it costs you thousands.
You don’t need to be doing anything wrong for this to apply to you. If any of these sound familiar, your salary is worth a second look:
- You picked your salary when you first became an S-Corp and haven’t changed it since
- Your profit has grown, but your salary has stayed the same
- You pay yourself little or no salary and take most of your income as distributions
- You pay yourself a large salary “just to be safe”
- You want to contribute more to your Solo 401(k) but aren’t sure how much you can
- Your health insurance is paid by the business but isn’t showing up on your W-2
It applies to every S-Corp owner who works in the business, whether you run a consulting firm, a medical practice, a construction company, a real estate business, an agency, or an e-commerce store.
Here’s how the numbers work:
- Too low is an audit risk. The IRS requires S-Corp owners to pay themselves a “reasonable salary.” If yours is too low, the IRS can reclassify your distributions as wages. If $80,000 gets reclassified, that’s about $12,240 in back payroll taxes, plus interest and penalties.
- Too high is money left on the table. Every extra $50,000 of salary above what’s reasonable costs about $7,650 in payroll taxes. That money could stay in your pocket as a distribution.
- Your salary drives your retirement savings. The employer side of a Solo 401(k) is based on your W-2 wages, so the right salary can open up thousands in extra pre-tax contributions.
- It affects your 20% QBI deduction. For higher earners, the deduction depends on the balance between salary and profit, so getting the mix right can add thousands in savings.
- The deadline is your last payroll of the year. Once your final 2026 payroll runs, your W-2 is locked. Bonuses, salary adjustments, 401(k) deferrals, and health insurance reporting all have to go through payroll before December 31.
The catch is that your salary is one decision connected to many others: your payroll, your books, your retirement plan, and your personal return. When different people handle each piece, nobody sees the full picture. Here’s what it looks like when one team handles it all:
- Payroll that fits your plan: full-service payroll, multi-state, plus contractor 1099s, adjusted whenever your salary should change
- Books that show the real numbers: monthly or annual bookkeeping, so your salary is based on actual profit, not a guess
- Estimates that stay accurate: quarterly payments recalculated when your salary or distributions change
- Sales tax, handled: registration and filings in every state where you’re required to collect
- Strategy that goes beyond salary: a one-hour review of every credit and deduction you qualify for, from retirement contributions to QBI and beyond
- One team for both returns: your S-Corp and personal returns prepared together, so every number lines up
Reply to this email by Monday and we’ll set up a free 15-minute call with our senior tax advisor to go over your situation. Bring your most recent payroll report and your last invoice from your tax advisor/strategist, tax preparer, bookkeeper, and payroll provider, so we can discuss how you can have everything under one roof.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com