How S Corp Owners Should Set Reasonable Salary vs. Distributions
Accounting expert David Riggs outlines why S corp owners must take a reasonable salary before distributions and how to document compensation decisions.
S corporation owners who work in their businesses face a tax rule that directly affects how much they pay in payroll taxes: they must receive a reasonable salary before taking any shareholder distributions, according to accounting expert David Riggs writing in HelloNation.
The distinction matters because distributions from an S corp are not subject to self-employment or payroll taxes, while wages are. The IRS scrutinizes arrangements where owner-employees take little or no salary and instead draw most of their compensation as distributions, viewing that structure as a mechanism to avoid payroll tax obligations.
Read more How Comparative Market Analysis Shapes Home Listing Prices →
Riggs identifies several factors that determine what counts as reasonable compensation, including the owner's specific job duties, relevant experience, the number of hours worked, and what comparable businesses pay employees in similar roles. These criteria align closely with the standards the IRS and courts have applied when challenging compensation levels in audits and litigation.
Documentation is central to the compliance strategy Riggs describes. Owner-employees need supporting records that justify the salary figure chosen, creating a defensible paper trail if the IRS questions whether the compensation is genuinely reasonable. Without such records, even a well-intentioned salary decision can become difficult to defend.
The broader implication is that S corp compensation planning is not simply a tax-minimization exercise but a compliance obligation with real audit risk if handled improperly. Continue reading at All Financial Services & Investing.
