S-Corp Owners: Is Your Salary Still Right for Your Business?

Ask most S-corp owners when they last looked at their salary, and you'll get a pause. Usually the answer is the year they made the election. They picked a number, put it on payroll, and moved on.

Meanwhile, the company changed. Revenue went up, they hired people, and the clients got bigger. Somewhere along the way, the owner stopped doing most of the work and started running the place. The paycheck stayed put.



Maybe that number was perfectly reasonable at the start, but I wouldn't assume it still is.

What Do You Actually Do All Day Now?

Try listing it. If you used to do the work yourself and now spend your week managing people, handling the big accounts, signing off on hires, and figuring out where the business goes next, your job is different from the one your salary was built around. The same goes if you went the other way and handed off the day-to-day work to someone else.



This matters because of how the IRS looks at it. There's no formula for reasonable compensation. They look at what the shareholder-employee does: duties, training, experience, hours worked, and what other businesses pay people for similar work.

A percentage of profit doesn't answer that question, and neither does a figure someone typed into a spreadsheet years ago.

Profit Doesn't Tell You What Your Work Is Worth

I hear this one a lot: "We made $300,000, so I'll pay myself a percentage of that." I'd skip that approach. Profit shows how the business did, and plenty of things drive it besides you, including your staff, your equipment, your systems, and any intellectual property. Your salary should reflect the work you personally do.



Distributions get misunderstood the same way. You're allowed to take them, but they can't stand in for a reasonable salary. If the IRS decides a distribution was really to pay for your services, it can treat it as wages.

When To Take A Fresh Look

The best time for a review is after something big changes. Start with your own duties and hours, and how much of the revenue still depends on you personally. Then look at your team and what people in similar roles earn elsewhere. 



Check how profit has moved, and whether you've gone from production into management. Finally, look at what the business can comfortably support in cash and how your salary and distributions fit together. 

None of this means giving yourself a raise because it was a good year. The point is just to check that your pay still matches what you do.

A Client Who'd Outgrown His Old Setup

One client had grown his company a lot over several years. At the start, he was right in the middle of the work customers paid for. By the time we sat down, employees handled most of the production, and he spent his time managing people, building relationships, and going over the finances. His salary hadn't moved with any of that.

We laid his responsibilities next to the company's results and cash needs, and the old arrangement clearly needed a second look. Landing on a new number wasn't the hard part.



What took the conversation was working out how his role had changed and what the business could carry without squeezing cash. I'd much rather start there than with "how little can I pay myself?"

Salary Touches More Than Payroll

What you pay yourself affects payroll taxes, cash flow, distributions, retirement planning, and how much stays in the company. S-corp retirement contributions, for one, are generally based on your wages, not your distributions.

So I don't like judging the owner's pay on its own. A number that looks good from one tax angle can look different once you think about your retirement plans and what the company needs to keep running.

Your Salary Should Reflect The Business You Run

If your role, your business, or your finances have changed since anyone last reviewed your salary, it's time. Start with your current financials and an honest list of your duties.

Compare that with what the market pays for the work, and see what the company's profit and cash can support. Then decide how to split salary and distributions, and whether the split makes sense for where you want to be in a few years.

You don't need a new number every time revenue wobbles. But a salary that was right three years ago might not be right now.

At Straight Talk CPAs, we look at owner pay as part of the whole financial picture. When your salary matches the business you're really running, tax planning and cash decisions get a lot simpler.

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