How Much Salary Should I Pay Myself?

If you've elected S-Corp status, this is probably the single question your tax advisor gets asked most. It matters because your salary is subject to payroll taxes, while your distributions are not — so there's a real temptation to pay yourself as little salary as possible. But the IRS has a rule for this: reasonable compensation.

What Does "Reasonable Salary" Mean?

The IRS requires S-Corp owners who work in the business to pay themselves a salary that reflects what they'd have to pay someone else to do the same job. If you pay yourself too little and take the rest as distributions, you're at risk of the IRS reclassifying distributions as wages — along with back payroll taxes, penalties, and interest.

There's no single formula the IRS publishes, but a defensible salary generally considers:

● What similar roles pay in your industry and geographic area

● Your specific duties — are you doing the core revenue-generating work, or mostly overseeing others?

● Time devoted to the business — full-time vs. part-time

● Your training, experience, and qualifications

● Company profitability — a business with thin margins can't always support a high salary

A Simple Way to Think About It

Ask: "If I hired someone else to do exactly what I do — same hours, same responsibilities — what would I pay them?" That number is your starting point for reasonable salary.

Example:

Say your S-Corp nets $150,000 after expenses, and you work full-time running the business. If someone with your skill set and experience would typically earn $75,000 in a similar role in your area, a salary meaningfully below that (say $30,000) would be a red flag. A salary in the $65,000–$85,000 range, with the remaining profit taken as a distribution, is much easier to defend.

Why This Matters

Getting this wrong has real consequences:

● Too low: Risk of IRS audit, back payroll taxes (both employer and employee portions), penalties, and interest — sometimes going back multiple years.

● Too high: You're paying unnecessary payroll tax on income that could have been taken as a distribution and unnecessarily limiting the S-Corp tax savings that made the election worthwhile in the first place.

Bottom Line

There's a sweet spot, and it's specific to your business, your role, and your local market. We help clients to benchmark reasonable compensation using industry salary data and document the rationale, so you have support if the IRS ever asks. If it's been a while since we've reviewed your salary — especially if your profit has grown or shrunk — it's worth revisiting.

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