Episode Details

Paying yourself the lowest possible S Corp salary might save taxes today, but it could create a much bigger tax bill later.

In this episode, Mike explains how to determine a reasonable S Corp salary based on your role, hours, local market wages, business profit, and cash flow. He also breaks down payroll timing, salary adjustments, documentation, and how to protect your S Corp tax savings while staying compliant with IRS rules.

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Chapters:

(01:00) What Is Reasonable Compensation?
An S Corp owner who actively works in the business must receive a reasonable W-2 salary based on what the business would pay someone else to perform the same work.

(03:05) The Goal Is a Defensible, Documented Salary
A reasonable salary shouldn’t be unnecessarily high or aggressively low. It should be supported by a clear process and adjusted as the business changes.

(04:05) Factors That Determine an S Corp Salary
The owner’s responsibilities, hours, industry, location, role in generating revenue, company profit, cash flow, and stage of growth all affect reasonable compensation.

(05:40) The Percentage Method and 40/60 Split
Using 40% to 50% of business profit as salary can provide a starting point, but a percentage alone doesn’t replace a complete reasonable compensation analysis.

(07:00) Using Market Wages and Replacement Cost
Breaking the owner’s work into technical, sales, marketing, and administrative duties can help calculate a salary using local market rates for each role.

(10:05) Comparing Salary to Business Profit
Reasonable compensation must also make sense in relation to the company’s profit, the owner’s involvement, available cash flow, and whether money is being distributed or reinvested.

(11:05) How Often Should an S Corp Owner Run Payroll?
Monthly or biweekly payroll is generally recommended, with a review later in the year to make any necessary adjustments or catch-up payments.

(13:15) How to Document Reasonable Compensation
Keep a written salary analysis, description of duties, estimated hours, market-wage data, payroll records, profit information, and year-end review notes.

(15:05) Two Businesses With Very Different Salaries
A real-world example shows why two owners with identical business profits can reasonably receive drastically different salaries based on their actual involvement.

(16:35) Protecting Your S Corp Tax Savings
The strongest S Corp strategy uses a salary that is reasonable, defensible, and documented instead of simply chasing the lowest possible number.

Podcast Host:

Mike Jesowshek, CPA – Founder and Host of Small Business Tax Savings Podcast
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