What's a Reasonable Salary for Your S-Corp?
The IRS requires S-Corp owners to pay themselves a “reasonable salary” before taking distributions. Set it too low and you risk an audit. Set it too high and you waste tax savings. This calculator finds the sweet spot.
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Reasonable Salary Calculator
IRS-compliant salary range with audit risk scoring
Disclaimer: This calculator provides estimates based on BLS salary data and 2025 IRS tax rates. Actual “reasonable salary” determinations depend on the totality of circumstances. Consult with a qualified CPA for personalized guidance.
Understanding S-Corp Reasonable Salary Requirements
When you elect S-Corp status for your LLC, you become an owner-employee. The IRS requires you to pay yourself a “reasonable salary” through W-2 payroll before taking any distributions. This salary is subject to FICA payroll taxes (the equivalent of self-employment tax), but your distributions are not.
How the IRS Defines “Reasonable”
There is no single IRS formula. Instead, the IRS uses a multi-factor approach based on case law and revenue rulings:
- Comparable salaries — What do employees in similar positions earn? (This is where BLS data matters.)
- Qualifications and experience — More experience and specialized skills justify a higher salary.
- Nature and scope of work — Are you the sole worker or do you have employees handling most tasks?
- Time devoted — Full-time owners should have a higher salary than part-time owners.
- Dividend history — A pattern of zero salary with large distributions is a red flag.
The Sweet Spot
Most tax professionals recommend setting salary at 50-70% of business net income. Below 50% raises IRS scrutiny. Above 70% means you are leaving tax savings on the table. This calculator uses BLS Occupational Employment Statistics to anchor your salary to real industry data, then adjusts for your specific experience and hours.
What About the Watson Case?
In Watson v. Commissioner (2012), a CPA who paid himself $24,000 on $203,651 of S-Corp income had his distributions reclassified as wages. The court required retroactive payroll taxes plus penalties. The key takeaway: your salary must reflect what you would earn doing the same work for someone else.
Frequently Asked Questions
What is a "reasonable salary" for an S-Corp owner?
The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. There's no exact formula — the IRS looks at factors like duties, experience, hours worked, and comparable salaries in your industry. Setting it too low triggers audit risk; too high wastes tax savings.
How does the IRS determine if my salary is reasonable?
The IRS applies a multi-factor test including: comparable salaries for similar services, your qualifications and experience, the nature and scope of your work, time devoted to the business, dividend history, and compensation agreements. Industry salary data (BLS) is a key benchmark.
What happens if the IRS says my salary is too low?
If audited, the IRS can reclassify distributions as wages, charging back employment taxes plus penalties and interest. Notable cases like Watson v. Commissioner (2012) show the IRS actively pursues S-Corp owners with unreasonably low salaries.
How much can I save with an S-Corp election?
Savings come from avoiding self-employment tax (15.3%) on the distribution portion. For a business owner making $150K who sets a $90K salary, the $60K distribution avoids ~$9,180 in SE tax. After S-Corp costs (~$2,500/yr), net savings are approximately $6,680.
When does an S-Corp election make financial sense?
Generally when your business net income exceeds $50,000-$60,000. Below that, the administrative costs ($2,000-$3,500/year for payroll, tax filings, and bookkeeping) can eat into or exceed the tax savings. Use this calculator to see your specific break-even point.
Need help setting your S-Corp salary?
Every business is different. A qualified CPA can review your specific duties, industry, and income to recommend a defensible salary that maximizes your tax savings. Book a free strategy session to get started.
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