S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines how S corp owner compensation rules affect payroll taxes and why documentation is critical.
S corporation owners who also work in their businesses face a specific IRS requirement: they must pay themselves a reasonable salary before drawing shareholder distributions, according to accounting expert David Riggs, writing in HelloNation.
The distinction matters because salaries are subject to payroll taxes while distributions generally are not. The IRS scrutinizes situations where working owners take little or no salary and instead pull most of their compensation through distributions, a structure that can reduce payroll tax liability but invites audit risk if the salary is deemed unreasonably low.
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Riggs notes that determining what qualifies as reasonable compensation is not arbitrary. Factors such as the owner's job duties, professional experience, hours worked, and what comparable employees or executives earn in similar roles all weigh into the analysis. A defensible salary figure should reflect what the business would pay an outside hire to perform the same work.
Documentation is a central theme in the guidance. Owners who cannot demonstrate how they arrived at their salary figure are vulnerable if the IRS challenges the arrangement. Maintaining records that tie compensation decisions to market data and business circumstances strengthens the owner's position considerably.
For S corp owners navigating self-employment tax planning, the reasonable salary rule represents one of the more consequential compliance decisions they make annually — one that requires both a justifiable number and a paper trail to support it. Continue reading at All Financial Services & Investing.
