Step-by-step · 3 min read
S corp salary and payroll
S corp owners must pay themselves a reasonable salary before taking distributions. Too low invites IRS attention; too high gives back the payroll tax savings that made the S corp worthwhile. A documented number in between is the goal.
- Who it fits
- S corp owners who work in the business.
- Figures
- 2026 tax year
The key rule
Pay what you would have to pay someone else to do your job, considering your role, hours, experience and local market rates.
How it works
Salary is subject to Social Security and Medicare tax: 15.3% combined, split between you and the company, up to the Social Security wage base ($184,500 for 2026), and 2.9% above it. Distributions are not. The lower the salary, the bigger the saving, which is why the IRS expects a reasonable number.
Courts look at your training and experience, duties and time spent, what comparable businesses pay for similar work, and how much of the profit comes from your personal work versus employees and capital.
5 steps
Describe your roles
List what you do and roughly how your time splits, for example 60% client work, 25% sales and 15% admin.
Find market data
Use salary surveys or Bureau of Labor Statistics data for each role in your area, weighted by your time.
Consider the business
A business with little profit can support a lower salary; one with high profit driven by your personal work usually needs a higher one.
Run payroll regularly
Pay monthly or twice a month, not as one December check. Withhold and file payroll returns on time.
Document the reasoning
Keep a short memo with your data and review it each year.
Example
A consultant
You run a software consulting S corp with $250,000 of profit, and do nearly all the billable work. Market pay for a senior consultant in your area is about $140,000. A salary near that is defensible; $40,000 would not be.
Common mistakes
- Only W-2 wages count for retirement plan contributions. A very low salary also limits your solo 401(k) or SEP.
- Paying no salary in a profitable year is the most common audit trigger for S corps.
Key dates
- January 31
- W-2s due to employees and the Social Security Administration.
- Quarterly
- Payroll tax returns (Form 941) and state filings.
Questions we hear
Is there a safe ratio, like 60/40?
No. Ratios are a common shortcut, but the IRS looks at what your work is worth, not a percentage of profit.
Can I change my salary mid-year?
Yes. Adjust it as profit becomes clearer, and document why.
What to send us
- Payroll reports
- Your role and hours
- Any salary data you used
Upload them to your client portal.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.