Why this matters
S-corp owners pay payroll tax (Social Security + Medicare) only on salary. Distributions are exempt. Paying $1 in salary and $100,000 in distributions saves payroll tax, and invites the IRS to reclassify distributions as salary, with penalties.
The IRS factors
Courts look at several factors in reasonable comp cases:
- Training, experience, and qualifications
- Duties and responsibilities
- Time and effort devoted
- Dividend history (really, distribution history)
- Compensation of comparable employees
- Compensation paid in past years
- Formal compensation agreements
How we set a defensible number
Comparable-salary data from BLS, PayScale, and Robert Half by role, industry, and geography. Document the analysis contemporaneously so it's in the file before an audit asks for it.
Have a specific situation?
Call the office and a human answers.
The 60/40 rule of thumb
Common guidance: 60% salary, 40% distributions for owner-operators in professional services. Not a bright-line rule but a reasonable starting point.
Common questions
- What if my S-corp had a bad year?
- Salary can scale down with company performance. Zero salary in a loss year is acceptable if owner took zero distributions too.
- Can I be both employee and contractor of my own S-corp?
- No. If you work for the corp, you're an employee for that work. Don't 1099 yourself.