💼 How Much Should an S Corp Owner Pay Themselves? — The 2026 Filing Season Guide to Reasonable Compensation
Many small business owners who elect S Corporation status ask the same question:
“What’s a safe and reasonable salary that won’t trigger IRS scrutiny?”
Paying yourself too little can raise audit flags, while paying too much can lead to unnecessary payroll taxes.
1️⃣ Why Reasonable Compensation Matters
The primary tax benefit of an S Corporation is the ability to split your income into W-2 wages and shareholder distributions.
Wages are subject to payroll taxes, while distributions are not. But from the IRS perspective, the rule is simple:
“If an owner actively works in the business, they must pay themselves a reasonable wage before taking distributions.”
When an owner takes very low wages and high distributions, the IRS may reclassify part of the distributions as unpaid wages, resulting in additional payroll taxes, penalties, and interest.
2️⃣ How the IRS Determines a “Reasonable” Salary
Tax law doesn’t specify an exact number. Instead, the IRS evaluates multiple factors, including:
- ① Duties and responsibilities — managerial tasks, sales, operations, technical work
- ② Time devoted to the business — full-time, part-time, or seasonal work
- ③ Comparable wages — what similar employees earn in your industry and region
Additional considerations include:
- Overall profitability of the business
- Whether the owner performs multiple roles
- Experience, licenses, and qualifications (CPA, EA, industry certifications)
During audits, the IRS often asks: “How did you determine this salary?”
Saving job posting screenshots, industry wage data, and a simple summary of your roles/time can make a huge difference.
3️⃣ Salary vs. Distribution — 2025 Income Rules
For the 2026 filing season (based on 2025 income), payroll tax rules are as follows:
- W-2 Wages
- Subject to 15.3% FICA (split evenly between employer and employee)
- Social Security applies up to $176,100 (2025)
- Medicare applies with no upper limit
- Shareholder Distributions
- No FICA or self-employment tax
- Taxed as pass-through income on Schedule E
The IRS looks closely when wages are significantly below what an equivalent employee would earn in the marketplace.
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4️⃣ Practical Example for 2026 Filing Season
▪ Sarah owns a small digital marketing agency structured as an S Corporation.
▪ 2025 net profit (before salary): $240,000
▪ She oversees client strategy, project management, hiring freelancers, and admin tasks.
Step 1 — Research comparable wages
• Digital marketing manager in her region: $85,000–$105,000
• Project/operations coordinator: $50,000–$65,000
Because Sarah performs dual roles (manager + operations),
a reasonable salary range is $95,000–$115,000.
Step 2 — Choose reasonable compensation
→ Sarah sets her W-2 salary at $100,000.
Step 3 — Determine distributions
• After payroll taxes and expenses, the remaining profit can be taken as shareholder distributions.
✔ Balanced structure: wage high enough for IRS compliance, remainder taken tax-efficiently.
5️⃣ Red Flags That Trigger IRS Scrutiny
The following patterns commonly raise audit concerns:
- High net profit but very low wages
- Example: $250,000 profit with only $20,000 wages
- Paying the same minimal salary every year
- Working full-time but taking little to no W-2 wages
- Mismatch between Form 941 payroll filings and W-2/K-1 reporting
• Business grows rapidly, but the owner keeps the same low salary for years
• No documentation supporting how wages were determined
These scenarios often lead the IRS to reclassify distributions as wages, triggering additional FICA, penalties, and interest.
6️⃣ Quick Checklist for S Corp Owners
- ✅ Document your role, duties, and time commitment
- ✅ Save at least 1–2 wage comparison sources (screenshots)
- ✅ Adjust wages when profit increases significantly
- ✅ Ensure W-2, payroll filings, and K-1 data align
- ✅ Always pay reasonable wages before taking distributions
This article is based on 2025 income rules for the 2026 filing season.
State tax laws may differ. This is general information, not individualized tax advice.