S-Corp Owners: What’s a “Reasonable Salary” and Why It Matters Before Year-End

djfiene
Oct 20
2 min read

💼 How to Know if Your S-Corp Salary Is “Reasonable” (and Why It Matters Before Year-End)

If you run your business as an S-Corporation, your salary can be one of the best ways to save money on taxes — but only if it’s set correctly.

Every year, I talk to business owners who ask the same question:

“How do I know if my salary is reasonable?”

It’s a great question — and the truth is, there’s no magic number.But there is a smart way to figure it out before year-end.

🧾 What the IRS Means by “Reasonable Salary”

When you own an S-Corp, you’re both an owner and an employee.

That means you get paid in two ways:

A salary, which goes through payroll and has payroll taxes.
Distributions, which are the profits you take out after paying yourself.

The IRS expects every S-Corp owner to pay themselves a reasonable salary for the work they do before taking distributions.

In simple terms:

You should be paying yourself an amount that makes sense for the job you do in your own business.

💡 Why It Matters

If your salary is too low, the IRS may decide that part of your distributions should have been wages — and that can mean extra payroll taxes and penalties.

If your salary is too high, you could be paying more in Social Security and Medicare taxes than you need to.

So the goal is to find that sweet spot — a salary that fits what you do and what your business earns.

🧮 How to Think About It

A good way to start is by looking at your total income and the distributions you’ve already taken.

Ask yourself:

How much work do I personally do in the business?
How much profit is left after paying myself?
Would this look “reasonable” if someone from the IRS saw it on paper?

Your salary should make sense when compared to your business’s income and the amount you’re taking out in distributions.

🕒 Why Now Is the Time to Review It

The important part is timing.Your salary has to be run through payroll before the year ends — you can’t fix it after December 31.

So now’s the perfect time to check where you stand.If your distributions have grown this year or your business had a better year than expected, you may need to adjust your salary with a year-end payroll run.

This quick review can save you headaches later — and possibly thousands in taxes.

✅ Simple Next Step

If you’d like a second opinion on whether your salary looks reasonable, I’m happy to help you run the numbers.

You can schedule a short year-end salary check-up, or download my free 5-Step Year-Round Tax-Savings Checklist for more strategies you can still use before December 31.

✍️ Final Thought

Getting your S-Corp salary right isn’t just about following IRS rules — it’s about keeping more of what you earn and making sure your tax plan actually works for you.

A few small adjustments before year-end can make a big difference when tax season comes around.