S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines how S corp owners can structure compensation to stay compliant and reduce payroll tax exposure.
S corporation owners who draw income from their businesses face a specific IRS requirement: they must pay themselves a reasonable salary before taking any shareholder distributions, according to accounting expert David Riggs, writing in HelloNation.
The distinction matters because salaries are subject to payroll taxes while distributions generally are not. The IRS scrutinizes cases where owners take little or no salary and instead extract most of their income as distributions, a practice the agency treats as an attempt to avoid employment taxes.
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Riggs identifies several factors that determine what counts as reasonable compensation, including the owner's specific duties, professional experience, hours worked, and what comparable businesses pay for similar roles. Those benchmarks are not arbitrary — they reflect criteria the IRS itself uses when auditing S corporation returns.
Documentation is central to the strategy. Riggs emphasizes that salary decisions require supporting records to withstand scrutiny. Without a clear paper trail showing how the compensation figure was derived, S corp owners face significant audit risk and potential back-tax liability.
For small business owners structured as S corporations, getting the salary-to-distribution ratio right is one of the most consequential annual decisions they make — affecting both tax liability and regulatory compliance. Continue reading at All Financial Services & Investing.
