The most critical decision for S Corp shareholders. Pay yourself too much, and you lose tax savings. Pay yourself too little, and you trigger an audit. Find your balance.
Unlike a Sole Proprietorship where all income is taxed the same, an S Corp allows you to split your income into two buckets with very different tax treatments.
Adjust the sliders below to see how splitting your income affects your tax bill and your audit risk.
Note: This is a simplified estimation focusing on Self-Employment (SE) / Payroll tax savings. Income tax is excluded as it applies to both buckets.
Salary cannot exceed Profit.
Vs. Sole Proprietorship
Determining risk...
The IRS does not give a specific number. Instead, they look at facts and circumstances. Click on the factors below to understand how the IRS evaluates your salary.
The most common mistake new S Corp owners make is taking $0 salary and $100,000 in distributions to avoid all payroll taxes. This is an automatic red flag for the IRS.
The IRS has the authority to reclassify your "Distributions" as "Wages". If they do this, you don't just owe the taxes you tried to skip.
You will owe:
Use a payroll service (like Gusto or ADP) to run a formal W-2 for yourself. Pay yourself consistently (monthly or quarterly), not just at the end of the year. Document why your salary is set at that level using the "Reasonable Compensation" factors.