Should an S-Corp Owner Take a Salary?

a photo of a woman's arm extending towards the camera holding a check which is all blurred out.
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print

The short answer to whether an owner of an s-corporation should take a salary is yes.  Of course, there are exceptions which is why this is occasionally an area of confusion for business owners, but this guide should help clear things up.

3 Reasons for an S-Corp Owner to Take a Salary

A close-up of a brown building with black metal lettering that says "Internal Revenue Service"

To Meet the IRS Requirement

The IRS requires a shareholder of an s-corp to take a salary if the officer provides services to the organization. Courts have found that shareholders are considered employees of the corporation and as such, they are subject to employment taxes.  If the officer is taking distributions and no salary, the IRS can reclassify these dividends as wages and there will not only be employment taxes owed, but penalties and interest.  These can be substantial and non-deductible. 

A binder full of papers on a desk and someone looking over them with a magnifying glass

To Avoid a Potential Audit

The IRS has been saying they are going to hire new agents with the goal of auditing partnerships and s-corporations. In this event, it would seem one of the main areas they will be examining is shareholder salary. In fact, an article written by IRS attorneys predicts that lack of officer compensation is one item that increases the risk of an audit. 

a close up image of a W-2 and two social security cars laying on top of it

To Pay In to Social Security

By taking a salary, you will be paying into the social security system. The less that is paid in, the less (if any) can be taken out. Also, with earned income, a retirement plan can be set up and money for retirement saved. There are some myths that the social security system will eventually fail, but this is most likely untrue. In that event, the government will have to find a way to raise more taxes, and what better way to make sure that everyone who is required to take a salary does so and pays into the system?

How Much Salary?

There is no set scale as to what salary an s-corp owner should take, but the IRS will be looking at several items. Scroll over the icons below to learn more:

a graphic of a person standing in the middle of a dotted-line circle with a clock, computer, paper, and person icon around him/her
Services provided by the shareholder.
a graphic with two gears
How much skill and education it takes to perform these services.
a graphic of an open book with a lightbulb coming out/in the middle of it
The education level of the officer providing the services.
a line graph with 5 points on it and the middle point is bigger - it has a dollar sign in the middle of it an a plant growing out of it
The profit of the corporation.
check mark icon
A longer list of items that the IRS will look at is in IRS Fact Sheet ES-2008-25.
IRS

A good safe harbor to use would be to take a salary up to the social security max.   If you’d like a specific range or number for the officers in your organization, we can help you come up with a formula to determine what the salary should be. 

Marian Pekelder, CPA | Strategic Advisor

With over 25 years of experience, Marian is a tax compliance and planning guru. Business owners can rely on her for answering questions with practical, well-researched advice. 

Work With Us

We have four office locations to best serve you and your business. Feel free to stop by, call, or send an email to learn more about our services.

Scroll to TopCall Now ButtonCall Us Now