S-Corp Tax Planning: Salary, Retirement & Savings Strategies

Key Takeaways

• S-Corp tax planning centers on balancing reasonable salary with distributions to minimize self-employment tax
• The QBI deduction (now permanent under OBBBA) adds complexity: higher W-2 wages can increase your 20% deduction
• Retirement plans through S-Corps allow contributions up to $69,000+ annually
• Health insurance premiums for 2%+ shareholders require special treatment
• Typical S-Corp owner saves $15,000-$50,000 annually through proper planning

S-Corp tax planning is where small business owners find some of their biggest savings. Unlike sole proprietors who pay self-employment tax on every dollar of profit, S-Corp owners can split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes).

But that’s just the beginning. The real optimization happens when you coordinate salary decisions with retirement contributions, QBI deductions, and health insurance strategies. Get it right, and you’ll save $15,000 to $50,000 or more annually. Get it wrong, and you’ll overpay taxes or invite IRS scrutiny.

At SDO CPA, S-Corps represent 80% of our practice. This guide covers the strategies we use every day to help clients minimize taxes while staying compliant with IRS requirements.

Why S-Corps Offer Unique Tax Planning Opportunities

S-Corporations combine the liability protection of a corporation with the pass-through taxation of a partnership. There’s no entity-level federal income tax. Instead, income passes through to shareholders who report it on their personal returns.

The key tax advantage: Self-employment tax savings through the salary/distribution split.

Here’s how it works:

• Salary: Subject to FICA taxes (15.3% total: 6.2% Social Security + 1.45% Medicare from both employer and employee, up to the $176,100 Social Security wage base for 2026)
• Distributions: Not subject to self-employment tax (only income tax)

Example: $250,000 Net Business Income

The S-Corp owner pays FICA on $90,000 of salary. The remaining $160,000 passes through as distributions without additional payroll taxes.

But there’s a catch: The IRS requires S-Corp owners who work in the business to take a “reasonable salary.” You can’t pay yourself $10,000 and take $240,000 in distributions. The salary must be reasonable for the services you perform.

Read our complete S-Corporation tax guide for foundational concepts.

Reasonable Salary Optimization

The reasonable salary decision is the foundation of S-Corp tax planning. Every other strategy builds on it.

What Is Reasonable Compensation?

According to IRS guidance, reasonable compensation is the amount that would ordinarily be paid for similar services by similar businesses. There’s no magic percentage or formula. It’s based on facts and circumstances.

The IRS looks at:

• The type of services you provide
• Your training and experience
• Time devoted to the business
• What comparable businesses pay for similar roles
• Your business’s revenue and profitability

For detailed IRS requirements, see our guide on determining S-Corp compensation.

Factors Determining Reasonable Salary

When SDO analyzes reasonable salary, we consider:

1. Industry and job duties — A marketing consultant has different salary benchmarks than a contractor
2. Time devoted to the business — Full-time vs. part-time involvement
3. Geographic location — San Francisco salaries differ from rural Texas
4. Experience and credentials — 20 years of experience commands higher pay
5. Comparable wages — What would you pay someone else to do your job?
6. Business profitability — Higher profits support higher salaries

Data sources for comparables include the Bureau of Labor Statistics, Salary.com, and industry-specific surveys.

The Salary/Distribution Balance

Finding the optimal balance requires analyzing multiple factors:

Too Low Salary Risks:

• IRS recharacterization of distributions as wages
• Back payroll taxes plus penalties and interest
• Trust fund penalty exposure (100% personal liability)
• Increased audit risk

Too High Salary Wastes:

• Unnecessary FICA taxes paid
• Reduced distributions available for QBI planning
• Can’t recover overpaid payroll taxes

Dollar Example: $200,000 Net Income

The right answer depends on your specific situation, industry, and income level relative to QBI thresholds.

When Higher Salary Makes Sense

Sometimes paying more salary actually benefits you:

1. Maximizing Social Security credits — Higher earnings increase your future benefits (up to the wage base)
2. QBI wage limitation — Above the QBI threshold, your deduction is limited by W-2 wages. Higher salary = higher deduction limit
3. Building retirement contribution room — Employer retirement contributions are based on W-2 wages. More salary = more contribution room
4. Spousal employment — Paying a working spouse creates separate Social Security credits and contribution room

S-Corp Retirement Plan Strategies

Retirement plans are where S-Corp tax planning really shines. You can shelter significant income from taxes while building wealth.

Solo 401(k) for S-Corp Owners

The Solo 401(k) is the most powerful retirement tool for S-Corp owners without employees (other than a spouse).

2026 Contribution Limits:

• Employee contribution: $24,500 (+ $7,500 catch-up if 50+)
• Employer contribution: 25% of W-2 wages
• Total maximum: $69,000 (+ $7,500 catch-up = $76,500 if 50+)

Example: With a $100,000 S-Corp salary:

• Employee contribution: $24,500
• Employer contribution (25% of $100K): $25,000
• Total: $49,500 in tax-deferred savings

Additional benefits:

• Roth option available (after-tax contributions, tax-free growth)
• Loan provision (borrow up to $50,000)
• No mandatory contributions (flexible year to year)

Read our Solo 401(k) complete guide for setup and administration details.

SEP-IRA Option

The SEP-IRA offers simplicity at the cost of flexibility.

2026 Limits:

• 25% of W-2 wages (up to $69,000)
• No employee contribution component
• Deadline: Tax filing deadline including extensions

When SEP-IRA beats Solo 401(k):

• You’re past the Solo 401(k) December 31st establishment deadline
• You want minimal administrative burden
• You don’t need the higher contribution limits of Solo 401(k)

See our SEP-IRA guide for comparisons.

Defined Benefit Plans for High Earners

For S-Corp owners with consistent high income (typically $400,000+), defined benefit plans allow massive contributions.

2026 Limits:

• Annual benefit up to $265,000 at retirement
• Contributions often exceed $100,000 annually
• Actuarial determination required

Ideal candidates:

• Ages 45-60 with stable high income
• Planning to retire within 10-20 years
• Willing to make required contributions annually

Trade-offs:

• Higher administrative costs ($2,000-$5,000 annually)
• Mandatory annual contributions (less flexibility)
• Must be properly designed and administered

Retirement Contribution Strategy

Coordinate your salary decision with retirement goals:

Example: Maximizing Retirement with $250K Net Income

Higher salary enables larger employer contributions but reduces distributions. The optimal point depends on your retirement savings goals and cash flow needs.

Year-end deadlines:

• Solo 401(k) employee contributions: December 31st
• Solo 401(k) employer contributions: Tax filing deadline (including extensions)
• SEP-IRA contributions: Tax filing deadline (including extensions)

QBI Deduction Planning for S-Corps

The Qualified Business Income deduction (Section 199A) allows a 20% deduction on pass-through income. For S-Corp owners, this adds another layer to salary optimization.

How QBI Works for S-Corp Owners

Your QBI deduction equals 20% of qualified business income, subject to limitations based on your taxable income.

2026 Thresholds (OBBBA Updates):

• Full deduction, no limitations: Below $203,000 single / $406,000 MFJ
• Phase-out range: $203,000-$272,300 single / $406,000-$544,600 MFJ
• Full limitations or SSTB exclusion: Above $272,300 single / $544,600 MFJ

Key point: The QBI deduction is now permanent under OBBBA. No more sunset concerns.

For complete details, read our QBI deduction guide.

The Wage Limitation and S-Corps

Above the phase-out threshold, your QBI deduction is limited to the greater of:

• 50% of W-2 wages paid by the business, OR
• 25% of W-2 wages + 2.5% of unadjusted basis of qualified property

For S-Corp owners, your W-2 salary directly affects this limitation.

Example: $500,000 QBI, Above Threshold

Without wage limitation: 20% × $500,000 = $100,000 deduction. But if salary is only $80,000, the deduction is capped at $40,000. That’s $60,000 of lost deduction, worth $14,400-$22,200 in taxes depending on bracket.

Use our QBI calculator to model your specific situation.

Balancing Self-Employment Tax vs. QBI

This is where S-Corp planning gets complex.

Below QBI Threshold:

• Lower salary = lower FICA = more money in pocket
• QBI deduction isn’t affected by wage amount
• Optimize for SE tax savings

Above QBI Threshold:

• Lower salary = lower FICA but potentially lower QBI deduction
• Higher salary = higher FICA but protected QBI deduction
• Must calculate both impacts to find optimal point

Example Analysis: $400,000 Net Income, Above Threshold

The optimal salary depends on your marginal tax rate and the interaction between FICA savings and QBI losses.

SSTB Considerations

Specified Service Trade or Business (SSTB) owners face stricter rules:

SSTB Categories:

• Health, law, accounting, actuarial science
• Performing arts, consulting, athletics
• Financial services, brokerage services

SSTB Impact:

• Below threshold: Full QBI deduction (SSTB status doesn’t matter)
• In phase-out range: Partial deduction based on income
• Above phase-out: Zero QBI deduction

Planning for SSTB Owners:

• Manage income to stay below threshold if close
• Maximize retirement contributions to reduce AGI
• Consider income timing (defer to lower years)
• Separate non-SSTB activities into different entities

S-Corp Health Insurance Strategies

Health insurance for S-Corp owners requires specific treatment but offers tax advantages.

The 2% Shareholder Rule

If you own more than 2% of the S-Corp, health insurance premiums receive special treatment:

1. Premiums must be included in W-2 Box 1 (wages)
2. Premiums are NOT subject to FICA if properly reported
3. You deduct premiums as self-employed health insurance on Form 1040 (above the line)

The net effect: You get a deduction without paying payroll taxes on the premiums.

Setup requirements:

• S-Corp must pay premiums directly OR reimburse the shareholder
• If reimbursed, premiums must be included in W-2 by year-end
• Proper payroll reporting is essential

Read our detailed guide on S-Corp health insurance rules for owners.

HSA Contributions Through S-Corps

Health Savings Accounts offer triple tax advantages:

1. Tax-deductible contributions
2. Tax-free growth
3. Tax-free withdrawals for qualified medical expenses

2026 HSA Limits:

• Individual coverage: $4,150
• Family coverage: $8,300
• Catch-up (55+): Additional $1,000

S-Corp treatment: Employer HSA contributions are included in shareholder W-2 (not subject to FICA) and deductible by the shareholder.

HRA and QSEHRA Options

Depending on your situation, health reimbursement arrangements may work:

• ICHRA: For S-Corps with employees, reimburse individual insurance premiums
• QSEHRA: For small employers (fewer than 50), simpler reimbursement option
• Spousal coverage: Strategic use of spouse’s employer plan can optimize costs

Distribution Timing and Planning

After salary and benefits, the remaining S-Corp profits flow to shareholders as distributions.

When to Take Distributions

Distribution timing affects cash flow and sometimes taxes:

• Quarterly distributions align with estimated tax payments
• Year-end distributions can be adjusted based on final tax projections
• Retained earnings build cash reserves but don’t reduce personal taxes (income passes through regardless)

For distribution rules and basis impacts, see our guide on S-Corp distribution tax rules.

Retained Earnings Considerations

S-Corps can retain earnings for business purposes, but remember:

• Income is taxed to shareholders whether distributed or not
• Retained earnings increase shareholder basis
• Accumulated Adjustments Account (AAA) tracks previously taxed income
• Built-in gains tax applies to C-to-S conversions (10-year recognition period)

Distributions vs. Loans

Sometimes shareholders need cash before distributions are appropriate:

Shareholder loans require:

• Proper documentation (promissory note)
• Reasonable interest rate (at least the Applicable Federal Rate)
• Intent to repay
• Actual repayment

Warning: Undocumented loans can be recharacterized as distributions or deemed wages.

Year-End S-Corp Planning Checklist

Effective S-Corp planning happens throughout Q4, not at tax time.

October (8-10 Weeks Out):

•  Review year-to-date salary vs. projected net income
•  Evaluate whether salary is reasonable for your role
•  Set up or review retirement plan status
•  Project full-year income against QBI thresholds
•  Schedule planning meeting with CPA

November (4-6 Weeks Out):

•  Make equipment purchase decisions (Section 179)
•  True up health insurance premiums on payroll
•  Plan charitable contributions
•  Finalize retirement contribution amounts

December (Final Month):

•  Run final payroll with W-2 optimization
•  Process health insurance premiums through payroll
•  Make Solo 401(k) employee contributions (deadline)
•  Decide: bonus vs. distribution timing
•  Execute year-end distributions

See our complete year-end tax planning checklist for more details.

Common S-Corp Tax Planning Mistakes

Mistake 1: Paying $0 or Minimal Salary

Some S-Corp owners try to avoid all payroll taxes by taking minimal salary.

Consequences:

• IRS can recharacterize distributions as wages
• Back payroll taxes plus penalties and interest
• Trust fund penalty (100% personal liability for unpaid employment taxes)

Mistake 2: Not Maximizing Retirement Contributions

Leaving retirement contributions on the table means:

• Missing $20,000+ in annual tax deductions
• Losing tax-deferred growth
• Reducing future retirement security

Mistake 3: Ignoring QBI Wage Limitation

S-Corp owners above the QBI threshold who don’t adjust salary may lose their entire QBI deduction due to insufficient W-2 wages.

Mistake 4: Improper Health Insurance Treatment

Common errors:

• Not including premiums in W-2
• Missing the self-employed health insurance deduction
• Paying FICA on premiums unnecessarily

Mistake 5: Year-End Scrambling Instead of Planning

By December 31st, many optimization opportunities have passed. October planning gives you time to:

• Adjust salary through remaining payrolls
• Set up retirement plans
• Make informed equipment purchase decisions
• Optimize QBI position

Real-World S-Corp Planning Example

Case Study: Marketing Consultant

Profile:

• Marketing consultant, single filer
• $350,000 net business income
• No employees, operates as S-Corp
• Age 48

Before Optimization:

• Salary: $60,000 (too low for income level)
• Distributions: $290,000
• No retirement plan
• QBI deduction: Limited by low wages
• Estimated tax liability: $98,000

After SDO Planning:

1. Increased salary to $110,000 — Reasonable for marketing consultant with this revenue
2. Established Solo 401(k) — $24,500 employee + $27,500 employer = $52,000 total
3. Added health insurance to W-2 — $12,000 in premiums, deductible above the line
4. QBI deduction increased — Higher wages support larger deduction (50% × $110K = $55K limitation vs. $30K before)

After optimization:

• Retirement contributions: $52,000
• QBI deduction: $55,000 (vs. $30,000 before)
• Tax liability: $61,000
• Annual savings: $37,000

Try our S-Corp tax calculator to estimate your potential savings.

Frequently Asked Questions

How much should I pay myself from my S-Corp?

Your salary should be reasonable for your role, industry, and geographic area. Most S-Corp owners pay themselves 30-60% of net business income as salary, with the remainder as distributions. The exact percentage depends on QBI considerations, retirement goals, and industry benchmarks.

Does my S-Corp salary affect my QBI deduction?

Yes, especially above the income threshold ($203,000 single / $406,000 MFJ for 2026). Above the threshold, your QBI deduction is limited based on W-2 wages. Higher S-Corp salary can actually increase your QBI deduction in these cases by raising the wage limitation.

What retirement plans can I use with an S-Corp?

S-Corp owners can use Solo 401(k) plans (up to $69,000+ annually), SEP-IRAs (25% of W-2 wages up to $69,000), or defined benefit plans ($265,000+ for high earners). The best choice depends on your income level, age, and savings goals.

How do I handle health insurance as an S-Corp owner?

If you own more than 2% of the S-Corp, health insurance premiums must be included in your W-2 Box 1 but are not subject to FICA. You can then deduct them as self-employed health insurance on your personal return. This provides a deduction without payroll tax cost.

When should I start S-Corp tax planning?

October is the ideal starting point. This gives you time to adjust salary through remaining payrolls, make retirement contributions before December 31st deadlines, and time year-end decisions. By December, many options are limited. January is too late for most current-year strategies.

How do I know if my S-Corp is being optimized correctly?

Signs of good S-Corp planning include: proactive October planning conversations, salary that balances SE tax and QBI, maximized retirement contributions, proper health insurance treatment, and clear explanations of strategy trade-offs. If your only CPA contact is at tax filing time, you’re likely missing opportunities.

Get S-Corp Planning Help

S-Corp tax planning isn’t one-size-fits-all. The optimal strategy depends on your income level, industry, age, retirement goals, and state tax situation.

At SDO CPA, S-Corps represent 80% of our practice. We analyze these situations daily and know how to find the optimization point between competing factors.

What an S-Corp Planning Engagement Includes:

1. Income projection and threshold analysis — Where do you fall relative to QBI and other thresholds?
2. Salary optimization modeling — Multiple scenarios showing tax impact of different salary levels
3. Retirement contribution strategy — Which plan type and contribution level maximizes your benefit?
4. Health insurance setup review — Ensuring proper treatment and maximum deduction
5. Year-end action plan — Specific steps with deadlines

Ready to optimize your S-Corp? Schedule your S-Corp planning consultation with SDO CPA.