S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs breaks down how S corp owner compensation rules affect payroll taxes and why documentation is critical.
S corporation owners who draw income from their businesses face a specific IRS requirement: they must pay themselves a reasonable salary before taking any shareholder distributions, according to accounting expert David Riggs, writing in HelloNation.
The distinction matters significantly for tax purposes. Salaries paid to owner-employees are subject to payroll taxes, while distributions are not. The IRS scrutinizes S corps where owners take little or no salary but receive large distributions, viewing the arrangement as a method to avoid payroll tax obligations.
Read more Required Minimum Distribution Rules Explained for Retirees →
Riggs outlines several factors that determine what constitutes a reasonable salary, including the owner's specific job duties, years of experience, hours worked, and compensation paid to comparable employees or contractors performing similar work in the same industry. None of these factors alone is decisive — the IRS examines the full picture.
Documentation is central to the strategy. Riggs emphasizes that salary decisions must be supported by written records that justify the compensation level chosen. Without that paper trail, S corp owners risk IRS reclassification of distributions as wages, which could trigger back taxes, penalties, and interest.
For small business owners structured as S corporations, getting the salary-to-distribution ratio right represents one of the more consequential annual financial decisions they face. Continue reading at All Financial Services & Investing.
