How to Determine a Reasonable S-Corp Salary: A Worked Example With Real Numbers

I spent my first two years as an S-corp owner guessing. My accountant asked what salary I wanted, I picked a round number that felt safe, and nobody wrote anything down. Then I read a Tax Court opinion where an owner did exactly that and lost. That was the end of guessing.

Here is the method I use now, worked through with a fictional but realistic business so you can copy the shape of it for your own.

The business: a $160,000 consulting practice

Meet Dana. She runs a one person marketing consulting S-corp. Net profit before her own compensation is $160,000. She works about 2,000 hours a year. She does everything, so the first instinct is to call her a consultant and look up consultant salaries. That is the wrong first move, because she is not doing one job. She is doing three.

This matters more than people think. The IRS standard asks what a comparable business would pay for similar services. If you collapse everything into one title, you end up comparing yourself to the wrong job.

Step 1: Break the job into roles

I had Dana keep a rough time log for a month. Her weeks looked like this:

The market rates came from Bureau of Labor Statistics occupational data and a couple of local job postings, which she printed to PDF and dated. That stack of printouts is the single most valuable thing in her compensation file. In every case I have read about, the owners who win are the ones who brought sources. The ones who lose brought opinions.

The blended number is $88,800. That is the midpoint of her defensible range. I like to bracket it at 85 to 115 percent, which gives $75,480 to $102,120. The band exists because no market survey is exact, and a range reads as analysis while a single precise number reads as a guess that got lucky.

Step 2: Sanity check against profit

Here is where the practitioner cross check comes in. Forty to sixty percent of $160,000 is $64,000 to $96,000. Dana's market based midpoint of $88,800 sits inside that band, which is reassuring. If her blended number had come out at $40,000, that would be a flag to recheck the inputs, because a full time professional running a $160,000 practice rarely has a defensible market salary that low.

Step 3: Pick the number and run the payroll math

Dana chose $90,000. It sits near the top of her range, which is fine. Choosing the high end of a defensible range is allowed. The requirement is reasonableness, not minimization.

At $90,000 of salary on $160,000 of profit, the 2026 payroll tax math works out like this. The salary is below the $184,500 Social Security wage base, so the full 6.2 percent applies on both the employee and employer sides, plus 1.45 percent Medicare each side. Total payroll tax: $90,000 times 15.3 percent, which is $13,770. The remaining $70,000 flows through as a distribution with no payroll tax.

Compare that to staying a sole proprietor. SE tax applies to 92.35 percent of the $160,000 profit, which is $147,760, all below the wage base, so 15.3 percent of that is $22,607. The S-corp structure saves about $8,837 in payroll tax at this split, before considering the extra costs of running payroll and filing the S-corp return. For Dana those costs run roughly $2,000 a year, so she is still clearly ahead.

Step 4: Write the memo

This is the step everyone skips and the step that matters most. Dana's memo is one page. It says what she does, shows the role breakdown, lists the three market sources with dates, shows the calculation, states the chosen salary, and notes that she reviewed and approved it in her capacity as sole shareholder. She signed it and put it in a folder with the source printouts.

That folder is the whole game. The IRS does not expect your salary to be perfect. It expects your process to be real. A documented method with real market data beats a clever number with no paper behind it every time.

What I would do differently next time

Two things. First, I would redo the time log quarterly instead of annually, because Dana's mix drifts. Some quarters she is 60 percent delivery and the admin work shrinks. The annual average is fine for the memo, but the quarterly logs make the whole thing harder to argue with.

Second, I would not round to a clean number. Ninety thousand looks chosen. Something like $89,500, tied to the calculation, looks derived. Small thing, but auditors notice round numbers the way teachers notice identical homework.

Related reading: The S-Corp 60/40 Salary Rule Is a Myth, and why the famous split has no legal standing.

Not tax advice. Worked example only. Agree your figure with a CPA before running payroll.