What Is a Reasonable Salary for an S Corp Owner?

Key Factors in Setting an S Corp Salary

How to Avoid IRS Red Flags with S Corp Owner Compensation

Sarah, a freelance graphic designer, converted her LLC to an S Corp to save on self-employment taxes. She paid herself a $30,000 salary while distributing $70,000 as profits. The IRS flagged her for audit—her salary was far below industry standards.

According to the U.S. Bureau of Labor Statistics (2023), the median wage for graphic designers is $57,990. The IRS expects S Corp owners to pay themselves "reasonable compensation" comparable to market rate.

1. Research salaries for your role on BLS Occupational Employment Statistics.
2. Use tools like Payscale to benchmark your location/experience level.

Pro Tip: The IRS S Corp Compensation Guide outlines audit risk factors.

Balancing Salary vs. Distributions for Tax Efficiency

Mark runs a consulting S Corp netting $150,000/year. By paying himself a $75,000 salary (matching local CPA averages) and taking $75,000 as distributions, he saved $11,475 in self-employment taxes versus being a sole proprietor (per Tax Foundation 2024 calculations).

1. Calculate your total net business income.
2. Allocate 40-60% as salary (adjust for industry norms).
3. Use distributions for the remainder.

Optimization Tips

• Document your research: Save salary surveys or job postings to justify your amount.
• Adjust annually: If profits grow, increase your salary proportionally.
• Consider benefits: Health insurance premiums paid by the S Corp may count toward reasonable compensation.
• Use SCORE.org’s templates for compensation plans.

FAQ

Q: Can I pay myself minimum wage in an S Corp?
A: Only if that matches market rates. A software developer paying $15/hour would trigger an audit—Glassdoor (2024) shows average developer salaries at $110,000+.

Q: How often should I reevaluate my S Corp salary?
A: Annually, or whenever your revenue changes by 20%+. Track adjustments in meeting minutes.

Summary

Determining what is a reasonable salary for an S Corp requires balancing IRS rules and tax savings. By benchmarking rigorously and documenting decisions, you can optimize your compensation confidently.