How S Corp Owners Should Set Salary vs. Distributions
Accounting expert David Riggs outlines IRS reasonable compensation rules for S corp owners and why documentation matters for payroll tax compliance.
S corporation owners who work in their businesses cannot simply take all profits as shareholder distributions — they must first pay themselves a reasonable salary subject to payroll taxes, according to accounting expert David Riggs, writing in HelloNation.
The IRS requires that working S corp owners receive compensation that reflects what a comparable business would pay for similar services. Factors used to determine an appropriate salary include the owner's duties, relevant experience, hours worked, and prevailing pay rates for similar roles in the same industry and region.
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The distinction carries significant financial consequences. Shareholder distributions are not subject to self-employment or payroll taxes, creating an incentive for owners to minimize salary in favor of distributions. The IRS scrutinizes this structure closely, and underreporting compensation can trigger audits, back taxes, and penalties.
Riggs emphasizes that salary decisions must be supported by contemporaneous documentation — records that demonstrate how the figure was determined and that it aligns with market standards. Without adequate records, owners face increased exposure if the agency challenges the compensation arrangement.
For small-business owners operating under the S corp structure, the core compliance takeaway is straightforward: setting a defensible, well-documented salary is not optional, and the amount must be established before any distributions are taken from the business. Continue reading at All Financial Services & Investing.
