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

S-corporation owners who work in the business have to pay themselves a reasonable salary before taking distributions. Salary is subject to payroll taxes; distributions aren't. That gap is the main reason owners elect S-corp status, and it's also why the IRS pays close attention to it.

There's no formula, but there is a method

The IRS doesn't publish a percentage. Instead it looks at what you'd have to pay someone else to do your job. We build that number from three angles:

1. Market data. Compensation surveys for your role, region, and company size.
2. Your actual duties. An owner who runs sales, operations, and finance is doing three jobs.
3. Company performance. Salary should move with the business. A flat $40,000 for ten years while profits triple is a red flag.

Common mistakes we see

• Taking zero salary in a profitable year "because cash was tight." Distributions that year undercut the argument.
• Copying last year's number without revisiting it.
• Paying a spouse who doesn't work in the business to shift income.

What to do now

If your salary hasn't been reviewed in two years, it's worth a conversation before year-end payroll closes. Changes are much easier to make in November than to defend in an audit.

This article is general information from a fictional firm on a concept site. It isn't tax advice for your situation.