S Corp Owners Must Balance Salary and Distributions Carefully
Accounting expert David Riggs outlines why reasonable compensation rules matter for S corp owners and how salary decisions affect payroll tax obligations.
S corporation owners who draw income from their businesses face a compliance requirement that carries significant tax consequences: they must pay themselves a reasonable salary before taking shareholder distributions, according to accounting expert David Riggs, writing in HelloNation.
The distinction matters because salaries are subject to payroll taxes while distributions generally are not. Owners who skew compensation heavily toward distributions — or skip a salary altogether — risk drawing IRS scrutiny and potential reclassification of those distributions as wages, which would trigger back taxes, penalties, and interest.
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Riggs emphasizes that determining what counts as reasonable is not arbitrary. Factors including the owner's specific duties, professional experience, hours worked, and pay rates for comparable positions in the same industry all feed into a defensible compensation figure. Without that analytical framework, the salary decision becomes difficult to justify during an audit.
Equally important, according to the piece, is documentation. Supporting records that show how a salary figure was derived are essential for any owner who wants to demonstrate compliance. A well-supported reasonable compensation study can be the difference between a clean audit and a costly reassessment by tax authorities.
For small-business owners structured as S corporations, the takeaway is that compensation planning deserves the same rigor as any other financial decision. Getting it wrong — even unintentionally — can erode the very tax advantages the S corp structure is designed to provide. Continue reading at All Financial Services & Investing.
