S-Corp Owners: Is Your Salary Reasonable?

Renee Daggett • March 13, 2019

IRS statistics show that business owners are choosing to form S corporations at an unprecedented rate – and with good reason.




After all, operating as an S corporation means that you can pass net profits to yourself without having to pay self-employment tax (Social Security, Medicare etc.) on the earnings. This is unlike partnerships or sole proprietorships, which must pay self-employment tax on every dollar of net profit they earn thus adding up to a hefty sum depending on how well your business has done for a particular year.

But remember, S corporations also have compliance issues that don’t exist for other types of entities. One of those is called, "Reasonable Compensation." Perhaps one of the main reasons S corporations get audited these days is that they file a tax return with no amount showing for “Compensation of Officers.” The IRS assumes that no one works for free. This means that officers of the corporation must receive “reasonable” wages. You need to pay yourself a salary – and pay the accompanying payroll taxes on your salary.


So what is a reasonable salary for an owner-officer of an S corporation?


The short answer is that it depends. It’s a gray area of tax law that has long been the subject of disputes between the IRS and business owners. In many areas, specific rules exist for determining various amounts, but there is no such rule for reasonable compensation. In general, here are some rules of thumb to follow when trying to determine what salary to pay yourself.
  • Use the same criteria to determine compensation of officers as you would for salary of non-shareholders. Think about what you would pay an employee of your company for the same position.
  • Research market rates for typical salary ranges in your industry for your type of position. Evaluate how valuable your knowledge, skills and abilities are to the position.
  • Take into account how many hours you normally work and what the prevailing rate per hour is for someone in your position.
  • Factor in some standard rate of return such as a commission rate of percentage of profits.
Generally, the IRS will allow an S corporation some flexibility in setting salary compensation for owner-officers. But an auditor will use some or all of the factors mentioned to establish what he or she considers reasonable in the event of an audit.


So what is an unreasonable salary?


Zero would definitely be considered unreasonable...unless perhaps it is your first year in business and your S corporation has very little income. You probably could not talk a potential employee into accepting anything below minimum wage either. Also, any amount that is an unusually small percentage compared to the net income of the business is a red flag. For example, if you make $500,000 in net profit but pay yourself a salary of only $10,000, it will not seem reasonable.




Realize that the IRS wants to collect payroll taxes on your salary, so it is in their best interest to maximize compensation at a reasonable rate. They know that many S corporations may try to avoid or minimize payroll taxes by paying officers low wages. Beware…the IRS can slap a penalty on you for failing to pay payroll taxes of 100% of the taxes owed.



The solution is simple: Pay yourself a salary that is reasonable compensation for your position in your industry .

It’s the safest business decision you can make. If you’re still unsure about how much to pay yourself, Admin Books can help. Call or email us to discuss your options.

crossing the finish line after tax season

Tax Season’s Over...Or Is It?

April 16, 2025
Tax season may be done, but your work isn’t. Learn five practical steps business owners should take after filing to avoid surprises and stay ahead all year.
Spring cleaning means cleaning up your finances before tax season ends

Spring Cleaning Your Finances: Tips to Get Organized Before Tax Season Ends

April 2, 2025
Organize your finances before tax season ends! Gather documents, maximize deductions, and streamline bookkeeping to reduce stress and save money.
Tax tips that will leave you with a pot of gold at the end of the rainbow

Your Pot of Gold Awaits: How to Save More on Taxes This Year

March 19, 2025
Stop leaving money on the table. Discover essential tax deductions, business credits, and smart accounting strategies to keep more of your hard-earned cash. Plan ahead and maximize your savings this tax season.
Basketball Representing Business March Madness and Financial Strategy

March Madness and Your Business Finances: Is Your Business a Slam Dunk or a Busted Bracket?

March 4, 2025
March Madness isn’t just for basketball—your finances need a winning strategy too! Learn how cash flow management, tax planning, and financial tracking can keep your business from a costly upset. Read more for expert tips!
Deadline for businesses filing a BOI

New BOI Deadline Announced - Is Your Business Ready?

February 19, 2025
The BOI reporting deadline has been extended to March 21, 2025, but more changes may be coming. Stay informed on the latest updates, compliance requirements, and what your business needs to do now. Read more on AdminBooks.
Computer screen with

Why You Must Enable Multi-Factor Authentication for QuickBooks Online

February 5, 2025
Protect your QuickBooks Online account from fraud by enabling multi-factor authentication (MFA). Follow our step-by-step guide to secure your financial data today.

BOI Update: Supreme Court Reinstates BOI Reporting

January 24, 2025
The Supreme Court has ruled to reinstate BOI Reporting.

Los Angeles County Tax Relief: Extended Deadlines & Disaster-Related Benefits

January 20, 2025
The recent wildfires in Los Angeles County have devastated communities, leaving thousands dealing with property loss, displacement, and financial uncertainty. In response, both the IRS and the State of California have granted tax deadline extensions and financial relief to help individuals and businesses recover.

Ready for the Deadline? What You Need to Know About 1099s

January 7, 2025
The new year is here, and with it comes an important deadline for business owners: January 31, 2025. If you’ve paid independent contractors, service providers, or freelancers $600 or more in 2024, you may need to file a 1099 form for them. With the deadline just weeks away, now is the time to get organized. Filing your 1099s on time not only avoids penalties but also keeps your business in good standing.

Important BOI Update!

December 30, 2024
The requirements for filing Beneficial Ownership Information (BOI) reports under the Corporate Transparency Act (CTA) have shifted yet again. As of December 26, 2024, BOI filing is not currently required, following an order from the Fifth Circuit Court of Appeals that restored an injunction against enforcing the CTA. However, this situation remains fluid and could change on short notice.
More Posts