If you own an S corporation, work in the business, and take money out, how you pay yourself matters. The IRS requires reasonable compensation for your services before you take non-wage distributions.
Keeping your salary artificially low can lead to the IRS treating distributions as wages and assessing additional payroll taxes.
What Makes a Salary Reasonable?
Your compensation should reflect your work. Relevant factors include:
- Your duties, experience, and hours.
- What comparable businesses pay for similar services.
- Whether revenue comes primarily from your work, other employees, or business assets.
Keep Support for Your Decision
Document how you determined your compensation. Keep salary comparisons, a description of your responsibilities, and your calculations with your corporate records. A professional compensation analysis may help when your role is complex.
Review your salary when your responsibilities or business change, and coordinate payroll adjustments before year-end.
Have questions about your S corporation salary? Contact Lisa at (954) 755-7302 to discuss your situation.