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How should you pay yourself as an S Corp owner in 2025? Learn how to set a reasonable salary, avoid IRS penalties, and maximize tax savings with this expert guide from Vincere Tax.
One of the biggest perks—and complexities—of forming an S Corporation (S Corp) is deciding how to pay yourself. Do it right, and you’ll minimize self-employment taxes and keep the IRS happy. Do it wrong, and you could face audits, penalties, and even reclassification of your income.
In this in-depth guide, we’ll walk you through the rules, strategies, and IRS expectations around S Corp owner compensation in 2025. Whether you're new to the S Corp structure or looking to fine-tune your payroll setup, this article will break it down in plain English—just how we like it at Vincere Tax.
S Corps offer a powerful tax advantage: you don’t pay self-employment tax (currently 15.3%) on distributions, only on your salary. But there’s a catch—you must pay yourself a “reasonable salary” for the work you perform.
The IRS is clear: owner-employees must be compensated fairly before taking any distributions. If you're underpaying yourself and only taking distributions, the IRS may reclassify those amounts and slap you with penalties, back taxes, and interest.
If you're an S Corp shareholder and you provide substantial services to the business (e.g., sales, operations, consulting, design, management), you're considered an employee and must be paid a salary.
📌 But if you’re doing any work that directly contributes to revenue or operations, you fall into the first category—and need to be on payroll.
The IRS defines it loosely as:
“The amount that would ordinarily be paid for like services by like enterprises under like circumstances.”
Translation: What would you pay someone else to do your job? That’s your benchmark.
Example: If you're a marketing consultant billing clients $150,000 a year and doing all the work yourself, a reasonable salary might be $70,000–$90,000, with the rest taken as distributions.
Let’s say your S Corp has $150,000 in net income after expenses.
This is the classic S Corp strategy: pay a fair salary, then take the rest as tax-efficient distributions.
You can’t just write yourself a check. You need to run a formal payroll, just like any employer.
1) Get an EIN from the IRS if you haven’t already.
2) Register for state payroll taxes (if required in your state).
3) Use payroll software or a provider like Gusto, ADP, or QuickBooks Payroll.
4) Withhold and remit payroll taxes:
5) File quarterly and annual payroll tax returns (Form 941, W-2, W-3, etc.).
📌 Tip: Avoid DIY payroll unless you’re confident in payroll tax rules. Errors can lead to IRS scrutiny.
The IRS doesn’t give a hard number, but they do expect documentation. Here are smart ways to justify your compensation:
Look at salary surveys from sites like:
If you wear multiple hats, break out your time:
No income? No salary required.
High profits? Higher salary expected.
Create a salary memo with:
⚠️ The IRS has audited many S Corps for underpaying. Good records = good defense.
Here are common mistakes that raise red flags with the IRS:
This is the biggest trigger for audits.
A $20K salary for a CEO generating $250K? Not believable.
Your pay should be regular—weekly, biweekly, or monthly.
Even if you file late, you're better off filing than ignoring it.
If your business barely breaks even or takes a loss, the IRS doesn’t expect you to pay a full salary.
In lean years, you may:
Remember: salary must come before any distributions.
Review your salary annually. If your profits increase significantly, adjust your pay accordingly.
Set up a Solo 401(k) or SEP IRA:
Your S Corp can pay your premiums. The cost:
If they work for the company, you can pay them a reasonable salary and reduce taxable income—just keep the work and pay legitimate.
Business: Freelance Web Designer (Solo S Corp)
Net income: $120,000
Strategy:
Savings:
If you want to dive deeper into the IRS rules, here are a few useful links:
Paying yourself as an S Corp owner isn’t just about cutting a paycheck—it’s about finding that sweet spot between tax savings and compliance. The goal isn’t to game the system. It’s to align your compensation with the value you bring to your business—and do it in a way that holds up under scrutiny.
If you're unsure where to start, we help S Corp owners like you every day. From reasonable compensation reports to payroll setup, our team can guide you step-by-step.
Not if you’re actively working in the business. You must take a reasonable salary first.
At least monthly is ideal to show consistency, though biweekly is common.
No. Once the year is over, your W-2 can’t be changed. Plan early.
The IRS may reclassify distributions as wages and charge back taxes, penalties, and interest.
There’s no magic number, but a 60/40 or 50/50 split is often considered reasonable—if supported by documentation.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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