S-Corp strategy
S-Corp Salary vs Distribution Optimization
The IRS requires “reasonable compensation” as W-2 salary. Everything beyond that can be distribution — saving 15.3% self-employment tax.
The short answer
On $200K of S-Corp profit, if the IRS-reasonable salary for your role is $80K, you save 15.3% SE tax on the $120K distribution = $18,360/year. Reasonable salary must reflect what an employee would charge for similar work in your market. Lowballing the salary is a common audit trigger.
Run the math yourself
These calculators give you the same numbers we used above — with your own inputs.
Bottom line
Three rules: (1) Document the salary calculation with comparable salary data, (2) Pay yourself bi-weekly W-2 like a real employee, (3) Run quarterly payroll reports. Most S-Corp owners under-salary by $20K and over-distribute. Use a payroll service like Gusto to keep it clean.
Disclaimer. This is educational, not personalized financial advice. Numbers depend on your specific tax bracket, state, and goals. Verify with the IRS, SSA, or a CPA before acting. See our Financial Disclaimer.