Does an S Corp Owner Have to Take a Salary?

Key Information about S Corp Owners

• The IRS requires S Corp shareholder-employees to pay themselves a reasonable employee salary, which means at least what other businesses pay for similar services.

Payment Methods for S Corp Owners

• One way owners of an S Corp can get paid is by receiving a salary as an employee of the company. This is the most common method of compensation for active owners who are involved in the day-to-day operations of the business.
• There are three ways to pay yourself when you own an S corporation: by distribution, also known as the owner’s draw, salary, or a combination of both.

Compliance and Tax Rules for S Corp Owners

• Factors to determine reasonable salaries include: training and experience, duties and responsibilities.
• The biggest risk you can take as an S Corp owner-employee is to take no salary at all. It is relatively simple for the IRS to develop a report of 1120S returns with no owner’s compensation and net profits or distributions, which means it’s hard to hide from the IRS if you aren’t paying yourself a salary.

Tax Implications and Payroll for S Corps

• If you are the sole owners and staff of your business, you can still receive PPP loans and use them towards your payroll costs.
• Payroll creates a tax planning advantage to the owner. Paying quarterly estimated taxes on your business is somewhat “clunky”. When you run payroll, you can withhold the forecast income tax liabilities form each paycheck – which makes paying taxes a little more like having a job than owning a small business.

Requirements for S Corporation Status

• To qualify for S corporation status, the corporation must: Be a domestic corporation, have only allowable shareholders, not be partnerships, corporations or non-resident alien shareholders, have no more than 100 shareholders.

Operating an S Corp

• Before discussing how to run payroll for an S Corp owner, let’s briefly recap what an S Corp is. An S corporation is a business that has the benefits of a typical corporation business structure without double taxation.