A reasonable salary is the amount the IRS expects you to pay yourself as an employee for the work you actually do in your business.

When you’re an S Corp owner, you’re both an employee and a shareholder. The “employee” part must get a legit wage — which means you run payroll, pay yourself through W-2 wages, withhold taxes, and pay your share of Social Security and Medicare.

The rest of your business profit comes out as distributions, which aren’t hit by self-employment tax — but only after you pay yourself that fair wage first.

Because the main reason small business owners elect S Corp status is to save money on self-employment tax — but if everyone just paid themselves $1 in wages and took the rest as tax-free distributions, nobody would pay into Social Security or Medicare.

So the IRS rules say you must pay yourself “reasonable compensation” for the work you do — or they can reclassify your distributions as wages, tack on penalties, and collect back taxes plus interest.

They know this trick. They look for it.

There’s no magic number — but the IRS expects you to look at:

✅ What you do (your role: are you doing everything or mostly managing?)
✅ What people in your industry & area get paid for similar work
✅ How much profit the business makes
✅ How many hours you actually work
✅ Your experience and qualifications

Example: If you run a solo consulting firm that brings in $100K profit, and you do all the work, the IRS expects you to pay yourself like a normal employee doing that work — maybe $40K–$60K salary, not $10K.

Technically, yes — but it’s rare.

Overpaying yourself in salary means more payroll taxes, so you lose some of the S Corp tax advantage. The sweet spot is fair market value: enough to stand up to an IRS audit, but not so much you’re giving back all your savings.

The goal is balance — protect the tax break without raising a red flag.

The IRS can reclassify your distributions as wages and hit you with:

🚨 Back payroll taxes
🚨 Penalties
🚨 Interest
🚨 Possible audit for other years

It’s one of the biggest reasons S Corps get in trouble. The IRS loves looking for owners who pay themselves almost nothing and take giant tax-free distributions.

Yes — real payroll with W-2s, paystubs, tax withholdings, and payroll filings.

You can’t just move money from your business account to your personal account and call it “salary.” It needs to go through proper payroll software (like Gusto or ADP) so federal and state taxes get withheld and reported.

If you skip this step, the IRS sees it as noncompliance — they can fix it for you… with penalties.

At least once a year — ideally twice.

If your business grows fast, your reasonable salary may need to adjust. If you’re making double what you were last year, the IRS expects your wages to reflect that.

When I help clients, we check at mid-year or year-end to make sure your numbers still make sense. Adjusting is easy if you stay ahead.

Good question — many owners wear multiple hats.

If you do billable work and run the company, the IRS expects you to be paid for the billable part. The management role can be “unpaid” if you’re the owner — but your time doing real, revenue-driving work? That counts.

Example: A design firm owner who bills clients directly should get paid a fair market designer’s wage for that time. Any extra profit from owning the business can be a distribution.