Reasonable Compensation for S-Corp Owners: Why It Matters

If you own 100% (or even part) of your S-Corporation, choosing a reasonable salary for yourself is not optional—it’s an IRS requirement.

Why it's important:

• The IRS expects S-Corp owners to take a reasonable W-2 payroll before taking distributions.

• Skipping or underpaying yourself can trigger IRS audits and potential penalties.

• Your salary must reflect what you would pay someone else to do your job, considering your skills, duties, and time spent.

When deciding your salary, think about:

• What would you pay someone else with your same responsibilities?

• How many hours are you truly working?

• Industry standards and geographic location.

If you have questions or need help benchmarking, let’s schedule a time to review it together—this is something you want to get right!

For Partnerships:If you’re part of a partnership, the concept is a little different. Instead of W-2 wages, partners are usually paid through guaranteed payments.Guaranteed payments compensate partners for their services and are deductible to the partnership. They’re different from profit distributions and should reflect the value of the work you’re doing in the business. It's a smart way to make sure you're being compensated fairly while keeping tax compliance in line.