What's a Reasonable Salary for an S Corp Owner?

By Jeff Bibby, CPA · October 26, 2026 · 3 min read

If you own an S corporation and work in the business, I'll ask you one question before we talk about anything else: what do you pay yourself on a W-2?

The answer matters because an S corp owner who works in the company is an employee. The IRS is clear that officers of an S corporation are employees for payroll tax purposes, even if they also own the shares. Pay for the work you do should run through payroll, with withholding and payroll taxes, before you take any distributions.

Why owners get this wrong

The temptation is easy to see. Wages carry Social Security and Medicare tax. Distributions don't. So some owners pay themselves a very small salary, or none, and take most of the profit as distributions.

The IRS has said S corporations shouldn't avoid employment taxes by calling pay for services a distribution, a loan or a personal expense. When the pay is too low for the work being done, the IRS can recharacterize distributions as wages.

So what number is "reasonable"?

There is no formula. The IRS says neither the tax code nor the regulations sets specific guidelines, and the courts decide on the facts of each case. The factors that come up include:

• your training and experience
• your duties and responsibilities
• the time and effort you put into the business
• what comparable businesses pay for similar work
• what you pay employees who aren't owners
• your history of distributions compared with wages

I'm not going to give you a percentage, because there isn't a safe one. A contractor who runs jobs, bids work and manages crews every day is in a different place than an owner who works part time and hires a manager.

A way to think about it

Ask what you would have to pay someone else to do your job. If you hired a manager to run the business tomorrow, what would they cost? That's closer to the question the IRS asks than any rule of thumb.

Then look at the rest of the picture. If you take $20,000 in wages and $150,000 in distributions, that's hard to explain. If your salary and your profit move in a way you can defend, you're in a better spot.

Two other things to know

• Health insurance for an owner who holds more than 2% of the company is reported as wages on the W-2, but isn't subject to Social Security and Medicare tax. It's easy to get wrong on the W-2.
• Paying yourself wages starts with having payroll set up. If you've been taking draws and no wages, that's the first thing to fix. Our affiliate, Jette Payroll, can handle that.

What I'd do this month

It's the end of October. If you're an S corp owner, this is a good time to look at how much you've paid yourself so far in 2026 compared with your profit, while you still have time to adjust before December 31.

This article is general information, not tax or legal advice for your specific situation. Tax rules change; talk with us before acting on it.