S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines how S corporation owners must structure compensation to stay compliant with IRS payroll tax rules.
S corporation owners who take shareholder distributions without first paying themselves a reasonable salary risk triggering IRS scrutiny and significant payroll tax liability, according to accounting expert David Riggs, writing in HelloNation.
Riggs explains that working owners of S corps are legally required to receive compensation commensurate with the services they perform before drawing any distributions. Factors that determine what constitutes a reasonable salary include the owner's duties, professional experience, hours worked, and what comparable businesses pay for similar roles. Without documented support for the salary figure chosen, owners leave themselves exposed during an audit.
Read more Required Minimum Distribution Rules: What Retirees Must Know →
The distinction between salary and distributions carries direct financial consequences. Wages are subject to payroll taxes — including Social Security and Medicare — while shareholder distributions generally are not. That gap creates an incentive for some owners to minimize salary and maximize distributions, a strategy the IRS has consistently challenged in court.
Riggs emphasizes that proper record-keeping is not optional. Supporting documentation — such as industry compensation surveys, written job descriptions, and time logs — provides the evidentiary foundation needed to defend a salary decision if the IRS questions it. Businesses that cannot produce such records face the risk of having distributions reclassified as wages, resulting in back taxes, penalties, and interest.
For small-business owners navigating S corp election decisions, the article serves as a practical reminder that tax efficiency must be balanced against compliance obligations. Continue reading at All Financial Services & Investing.
