What is a Reasonable Salary for an S Corp Owner?
A reasonable salary is the amount an S corporation owner-employee should receive to cover the cost of the services they provide the business. The IRS requires owners to pay themselves a reasonable salary to ensure they are paying employment taxes.
The 50/50 rule and 60/40 rules are good starting points for determining a reasonable salary. However, the IRS will scrutinize if you don’t pay a salary similar to others in your field. Therefore, follow the criteria set by the IRS regarding what they consider reasonable:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Market rate for type of work performed
Even with a reasonable salary, your other compensation will enjoy tax savings. But if you work in your S Corp, you likely need a reasonable salary.
What’s a Good Reasonable Salary Range?
Your reasonable salary is one of the most scrutinized numbers by the IRS. They will consider many factors that impact your salary.
Another court case determined a shareholder should not be paid a lower salary than less-experienced employees. Exceptions are when profits or cash are insufficient to pay owners an appropriate salary.
In summary, to avoid IRS issues, self-employed individuals and business owners must figure out a fair salary. Setting a reasonable salary can maximize earnings and reduce audit risk that could cost your business dearly.
At What Income Level is S Corp Worth It?
An S-corp may provide tax savings over other structures. However, only U.S. citizens and resident aliens can form one. It also limits shareholders to 75.
Whether an S-corp makes sense depends on your situation. Consider expected income and expenses. Compare possible tax savings to S-corp costs. For lower or uncertain income, an LLC may be better. If income grows high enough, an S-corp could have more advantages.
Speak to an accountant to analyze specifics. If just starting out with uncertain income, wait on filing as an S-corp. Revisit when income increases.