What counts as a "reasonable salary" for an S-corp owner?

Pay yourself too little and you invite IRS attention. Too much and you give up the savings. Here's how to find the number.

The whole point of an S-corp election is that you split your income: part is salary (with payroll taxes) and part is distributions (without them). The question everyone asks is how much has to be salary.

The rule

If you work in the business, you must pay yourself a reasonable salary before taking distributions. The IRS doesn’t publish a formula. “Reasonable” means roughly what the business would pay someone else to do the work you do.

What goes into the number

Your role and duties. CEO, engineer, salesperson, or all three?
Time spent. Full-time and part-time are different numbers.
Market pay for similar roles in your area and industry.
What the business can actually afford. A company with $40,000 of profit can’t justify a $150,000 salary.
Your training and experience.

Myths

“60/40 is the rule.” It’s not. Some splits are reasonable at 60/40, and some aren’t. It depends on the facts.
“I can pay myself nothing in a good year.” Taking distributions with no salary is one of the most common audit triggers for S-corps.
“I’ll fix it at year-end.” Salary runs through payroll during the year. You can’t backfill it in April.

Document it

Write down how you arrived at the number: market data, your duties, and hours. If the IRS ever asks, a documented, thought-through number is far easier to defend than a guess.

The short version

Pay yourself what you’d have to pay someone else to do your job, run it through payroll during the year, and write down how you got there. We do documented reasonable-salary calculations for $300 if you want a defensible number.