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MSM Mondays is our biweekly series of accounting insights for businesses, designed with business owners in mind.
One of the most common questions S-Corp owners ask is whether they’re paying themselves the right amount. If you’re an S-Corp shareholder who actively works in your business, this is a topic you can’t afford to overlook. Are you required to receive wages from your company? If so, how much should you be compensated? The short answer: If you provide services to your company, then yes, you are most likely required to receive compensation from your S-corp.
Do S-Corp Owners and Shareholders Have to Pay Themselves a Salary?
Any S-Corp shareholder that performs anything more than minor services for the company should be treated as an employee for compensation purposes. Before the S-Corp makes any non-wage distributions to a shareholder-employee, the shareholder must receive reasonable W-2 wages from their company. If the IRS believes that the shareholder-employee’s W-2 wages were too low, then they may reclassify those non-wage distributions as wages subject to employment taxes.
What Is Reasonable Compensation For an S-Corp Shareholder?
First, you need to consider what the shareholder-employee actually did for the company and how revenue (or gross receipts, in IRS terminology) was generated for the S-Corp by that activity. To the extent revenue is generated by non-shareholder employees, capital, or equipment, some payments may properly be treated as non-wage distributions. However, the shareholder-employee should still receive wage treatment for personal services to the company, including administrative or management work supporting those employees or assets.
Why Documentation Matters for S-Corp Compensation
Data related to how the salary was set – such as job duties, hours worked, comparable salary data, compensation formulas, etc. – should be well-documented. The IRS maintains the right to adjust both the corporation’s and shareholder’s tax returns if it feels that shareholder-employee compensation did not line up with the duties they performed, so it is extremely important to maintain adequate documentation.
Are Shareholder Wages Subject to Payroll Taxes?
Just like regular employee wages, shareholder-employee wages are subject to taxes. Federal income tax withholding and the employee share of FICA generally apply to shareholder-employee wages, and the S-Corporation is also responsible for applicable employer employment taxes, including employer FICA and FUTA.
The Bottom Line
There is no one-size-fits-all formula to determine reasonable compensation for an S-Corp shareholder. Because the IRS evaluates each business on a case-by-case basis, it is essential to do thoughtful planning and maintain proper documentation. If you’re unsure whether your current compensation would be considered reasonable by the IRS, contact us to set up a consultation. Our team can help you evaluate your specific situation and document a defensible approach.
Keep Up With MSM Mondays
New to the series? Catch up on our previous article about 529 Plans to learn how they can help you to save for your loved ones’ education while taking advantage of valuable tax benefits. Be sure to follow us on social media so that you never miss an MSM Monday.
Disclaimer
Please note that the information shared in MSM Mondays is intended for general informational purposes only. It is not a comprehensive analysis of every situation, nor should it be considered a substitute for personalized accounting, tax, or legal advice. Because every business is unique, we encourage you to consult with a CPA regarding your specific circumstances. If you have questions or would like guidance tailored to your business, our team is always happy to help!
