Step 1: Your role mix
The IRS standard is what a comparable business would pay for similar services under comparable circumstances. There is no IRS formula. Split your time across up to three roles and enter the market hourly rate for each, from BLS data, trade surveys, or job listings for your area.
What the IRS actually looks at
Courts and the IRS evaluate reasonable compensation on the facts, including training and experience, duties and responsibilities, time and effort devoted, dividend and distribution history, pay to non-shareholder employees doing similar work, timing and manner of bonuses, and, carrying the most weight, what comparable businesses pay for comparable services.
2026 payroll tax figures used here: Social Security wage base $184,500 (6.2 percent employee plus 6.2 percent employer up to the cap), Medicare 1.45 percent each side with no cap. Sources: IRS guidance, SSA 2026 announcement via The Tax Adviser.
Compensation file checklist
If the IRS asks, your file should already answer every question. Keep these:
- Written role description with actual weekly responsibilities
- Estimated hours by function: sales, delivery, management, admin, strategy
- Three to five market wage benchmarks for similar roles in your area, with dates and sources
- Company financials showing profit before owner compensation
- Board or shareholder minutes approving the compensation figure
- A short memo explaining your method, your chosen number, and why it is reasonable
- Time records, even a simple weekly log, supporting your hours
Review the analysis every year. Roles evolve, markets move, and a salary that was reasonable in 2024 may not be in 2026.
Guides
How to Determine a Reasonable S-Corp Salary: A Worked Example With Real Numbers
I walk through a $160,000 profit consulting business, three roles, and the exact memo I would put in the compensation file.
The S-Corp 60/40 Salary Rule Is a Myth: What Practitioners Actually Use
Why the famous split has no legal standing, what courts really said, and the cross checks CPAs use instead.
Frequently asked questions
What is a reasonable salary for an S-corp owner?
Whatever a comparable business would ordinarily pay someone with your skills to do the same work under similar circumstances. The IRS weighs your training, duties, hours, and especially comparable market pay. No single number works for everyone, which is why this calculator starts from your role mix instead of a fixed percentage.
Is the 60/40 salary to distribution rule an IRS rule?
No. It has no IRS endorsement, no legal standing, and no safe harbor protection. Tax courts have explicitly rejected mechanical formulas. Practitioners use ratios like 40 to 60 percent of profit only as a rough cross check against a market based analysis.
What happens if my S-corp salary is too low?
The IRS can recharacterize distributions as wages and assess back FICA taxes for both the employee and employer shares, plus failure to deposit and accuracy penalties with interest. Low salaries with large distributions are a well known audit target.
Do distributions avoid payroll tax entirely?
Distributions are not subject to FICA, which is the source of the S-corp savings. But you must pay yourself a reasonable salary first, and the salary plus the payroll tax on it still has to leave the business profitable enough to support the distributions.
Can I just take a salary and skip distributions?
Yes, nothing requires distributions. But salary is subject to payroll tax while distributions are not, so taking your full profit as salary usually means paying more tax than necessary. The point of the analysis is to defend the salary, then let the rest flow through.
How often should I redo this analysis?
Annually. Your duties, hours, local market wages, and business profitability all change. Document the review each year even if the number stays the same.
Data and method sources: IRS, S Corporation Compensation and Medical Insurance Issues; SSA 2026 wage base announcement ($184,500) via The Tax Adviser; U.S. Bureau of Labor Statistics wage data methodology. 2026 rates: Social Security 6.2 percent each side to $184,500; Medicare 1.45 percent each side, no cap.