How much should you pay yourself from your S-Corp? The IRS doesn’t give you a number. There’s no formula. No percentage. What they do give you is a requirement: reasonable compensation.
This guide provides industry-specific salary benchmarks, explains the IRS factors used to evaluate compensation, and helps you document a defensible salary for your S-Corporation.
Key Takeaways
- Reasonable compensation is market-based, not a percentage—the 60/40 rule is a myth with no IRS basis
- Comparable salary data is the most heavily weighted IRS factor for evaluating your compensation
- Document everything: job description, comparable salaries, annual review process
- IRS consequences are severe—reclassified distributions trigger back taxes, 25% penalties, and interest
- Review salary annually as your role, business performance, and market rates change
Table of Contents
What Is Reasonable Compensation for S-Corp Owners?
Reasonable compensation is the amount you’d have to pay an unrelated employee to perform the same services in the same geographic location. The IRS requires S-Corp owners who perform services for their corporation to pay themselves this market-rate salary before taking distributions.
Why does this matter? Because distributions aren’t subject to payroll taxes. Salary is. The temptation to minimize salary and maximize distributions is real. The IRS knows this.
The core rule: If you work in your S-Corp, you must receive reasonable W-2 compensation. Then you can take distributions from remaining profits.
For a deeper dive into compensation requirements, see our guide on Determining S-Corp Compensation & IRS Requirements.
IRS Factors for Determining Reasonable Salary
The IRS Reasonable Compensation Job Aid outlines the factors they consider when evaluating whether your salary is appropriate. These include:
1. Training and Experience
- Education and certifications
- Years in the field
- Specialized skills
2. Duties and Responsibilities
- Job complexity
- Scope of decision-making
- Time commitment required
3. Time and Effort Devoted
- Hours worked weekly
- Year-round involvement vs. seasonal
4. Comparable Salaries
- What similar businesses pay for similar work
- Geographic adjustments
- Company size considerations
5. Dividend History
- Pattern of distributions vs. salary
- Changes over time without explanation
6. Compensation Agreements
- Formal employment agreements
- Written policies
7. Timing and Method of Payment
- Regular payroll vs. sporadic payments
- Year-end salary adjustments that look like distribution reclassification
The most heavily weighted factor is typically comparable salaries. What would you pay someone else to do your job?
Three IRS-Recognized Methods
The IRS recognizes three approaches for determining reasonable compensation:
Market Approach (Most Common)
Compare your compensation to similar positions at similar companies. Use sources like:
- Bureau of Labor Statistics (BLS) data
- Salary.com
- PayScale
- Glassdoor
- Industry-specific surveys
Income Approach
The “independent investor test.” Would a hypothetical investor in your company be satisfied with the return after paying your salary? If officers take minimal salary but the company generates huge profits, the return looks too high, suggesting salary is too low.
Cost Approach
Break down your role into component tasks. Calculate the time spent on each and price each function separately. Sum the parts to arrive at total compensation.
Most S-Corp owners rely primarily on the market approach with supporting documentation from the other methods when helpful.
Reasonable Salary Benchmarks by Industry
These ranges are starting points based on BLS data and industry surveys. Your specific salary depends on location, experience, hours, and business complexity.
| Industry/Profession | Typical Salary Range | Factors Affecting Range |
|---|---|---|
| IT Consulting | $80,000 – $175,000 | Specialty, client base, certifications |
| Real Estate Agent/Broker | $50,000 – $120,000 | Market, transaction volume, team size |
| Medical Professional (Non-Physician) | $70,000 – $150,000 | License type, specialty, setting |
| Physician | $150,000 – $350,000+ | Specialty, practice ownership, hours |
| Attorney | $80,000 – $250,000+ | Practice area, partner status, location |
| Marketing/Creative Agency | $60,000 – $140,000 | Agency size, client roster, role |
| Construction Contractor | $55,000 – $130,000 | Trade specialty, crew size, project scope |
| E-commerce | $50,000 – $120,000 | Revenue, fulfillment complexity, hours |
| Financial Services | $75,000 – $200,000 | AUM, license level, services offered |
| Accounting/Bookkeeping | $60,000 – $130,000 | Client count, complexity, credentials |
| Consulting (General) | $70,000 – $160,000 | Industry focus, client size, engagement type |
| Restaurant Owner | $45,000 – $90,000 | Hours worked, management involvement, location |
Important caveats:
- These are national ranges; adjust for your metro area
- High-cost cities (NYC, SF, LA) may be 20-40% higher
- Rural areas may be 20-30% lower
- Part-time involvement warrants lower salary
- Profit level doesn’t determine your salary, but massive profits with minimal salary is a red flag
Use our S-Corp Tax Calculator to model how different salary levels affect your total tax liability.
The 60/40 Rule Myth
You may have heard that you should pay yourself 60% of your S-Corp income as salary and take 40% as distributions. Or 50/50. Or some other percentage.
This is a myth with no IRS basis.
Tax courts have explicitly rejected arbitrary percentage formulas. In JD & Associates v. Commissioner, the court stated that mechanical formulas cannot substitute for market-based analysis. Reasonable compensation must reflect actual services performed, not a predetermined split.
The 30-50% range you may see quoted is an observation of what many S-Corps do, not a guideline for what you should do. Your salary should be based on market data, not a percentage of profits.
What happens in practice:
- $100K net income with $40K salary (40%) might be reasonable for a part-time consultant
- $500K net income with $200K salary (40%) might be too low for a full-time professional
- $500K net income with $100K salary (20%) almost certainly triggers scrutiny
The percentage is irrelevant. The market rate for your services is what matters.
IRS Red Flags and Audit Triggers
The IRS uses data analytics to identify potential audit targets. These patterns consistently draw attention:
Zero or Minimal W-2 Wages
Taking only distributions when you actively work in the business is the biggest red flag. Some owners think paying $12,000 or $24,000 satisfies the “some salary” requirement. It doesn’t.
Distributions Significantly Exceeding Salary
A 10:1 ratio of distributions to salary when you work full-time suggests manipulation. There’s no safe ratio, but extreme imbalances trigger review.
Compensation Far Below Industry Norms
Paying yourself $40,000 when comparable positions pay $120,000+ is difficult to defend.
High Profits with Low Officer Compensation
An S-Corp generating $800,000 in profit with officer compensation of $50,000 looks suspicious, especially if the officers work full-time.
Sudden Salary Changes Without Documentation
Cutting salary 50% year-over-year with no change in duties suggests tax motivation rather than business rationale.
How to Document Your Salary Decision
Documentation is your best defense. If the IRS questions your compensation, you want a file ready.
1. Comparable Salary Data
Gather and retain:
- BLS Occupational Employment Statistics for your profession
- Screenshots from Glassdoor, Salary.com, PayScale
- Industry-specific salary surveys
- Job postings for similar positions in your area
2. Job Description
Document your actual responsibilities:
- Hours worked per week
- Key duties and decisions
- Supervisory responsibilities
- Client-facing activities
3. Board Resolution or Meeting Minutes
If you’re the sole shareholder, prepare a written resolution documenting:
- The salary amount
- The basis for the determination
- The effective date
- Annual review process
4. Annual Review
Review compensation annually. Document that you considered:
- Changes in duties
- Changes in business performance
- Updated market data
Keep these records for at least six years (three years plus three for significant adjustments).
Consequences of Getting It Wrong
If the IRS determines your salary was unreasonably low, the consequences are significant:
Reclassification of Distributions
The IRS reclassifies excess distributions as wages. You owe the payroll taxes you should have paid.
Back Payroll Taxes
You’ll owe both the employee and employer share of FICA (15.3% total) on reclassified amounts.
Failure to Deposit Penalties
Penalties for not depositing payroll taxes can reach 25% of the underpayment.
Interest
Interest accrues on unpaid taxes from the original due date.
Personal Liability
The Trust Fund Recovery Penalty can make you personally liable for unpaid employment taxes, even in an LLC or corporation.
Example:
$200,000 in distributions reclassified as wages:
- FICA taxes: $30,600 (15.3%)
- Penalties (25%): $7,650
- Interest (estimated): $3,000+
- Total exposure: $40,000+
For filing deadline information, see S-Corp Tax Deadlines & Filing Requirements.
Frequently Asked Questions
What is the average S-Corp owner salary?
There’s no meaningful “average” because it depends entirely on industry, location, hours, and role. A full-time IT consultant in San Francisco might appropriately pay themselves $150,000 while a part-time e-commerce operator in a rural area might pay $40,000. Both could be reasonable.
Can I pay myself $0 salary from an S-Corp?
Only if you don’t perform services for the corporation. If you’re a passive investor and someone else runs the business, zero salary may be appropriate. If you work in the business, even part-time, you need W-2 wages.
What happens if my S-Corp salary is too low?
The IRS can reclassify distributions as wages, assessing back payroll taxes, penalties, and interest. This is the most common S-Corp audit issue and can result in five-figure assessments.
How often should I review my S-Corp salary?
Annually, at minimum. Review when your role changes, when business performance changes significantly, or when you have new comparable salary data. Document each review.
Does my S-Corp salary affect the QBI deduction?
Yes. Higher salary reduces your qualified business income (the K-1 portion), but it also increases your W-2 wages, which affects the wage limitation for high-income taxpayers. There’s an optimization balance.
Where can I find salary data for my profession?
Start with BLS Occupational Employment Statistics. Supplement with Glassdoor, Salary.com, PayScale, and industry associations. Use multiple sources for a defensible range.
Setting a Defensible Salary
Reasonable compensation isn’t about finding the lowest number you can justify. It’s about paying yourself what the market would pay for your services. Document it. Review it annually. Keep records.
The S-Corp structure offers real tax advantages when used properly. Those advantages come from legitimate salary optimization, not from artificially low compensation that invites IRS challenge.
If you’re unsure whether your current salary is defensible or want help analyzing the optimal level for your situation, schedule a consultation. We work with S-Corp owners across industries and can help you establish compensation that’s both tax-efficient and audit-proof.
For more on S-Corp compensation requirements, see our comprehensive S-Corp Reasonable Compensation Guide.