S-Corp Owners: What Should You Review Before Making Your Final Compensation Decisions?

You can spend a year growing the business, taking on more work, and bringing in more revenue, and still pay yourself the same salary you set last year. It’s easy to let that slide. But it leaves a question hanging: does what you pay yourself still match the business and the job you’re doing now?



Before the year closes, I’d look at your salary, your distributions, your responsibilities, and your cash together. The aim is a salary that’s reasonable and that the company can afford.

Has Your Role Changed Since You Set Your Salary?

Your salary is supposed to reflect the services you provide. Maybe you started out doing sales and client work, and now you manage staff, run operations, and make most of the big calls. That’s a different job, and your pay should be looked at with it in mind.



When the IRS evaluates reasonable compensation, it looks at things like training, experience, duties, the time you put in, and what comparable work pays. There’s no set percentage that works for every S corporation.

So write down what you actually do and roughly how many hours it takes. Then figure out what it would cost to hire someone to do the same work. If the two jobs look very different, last year’s payroll number probably isn’t the right starting point. A salary that was reasonable when you set it can fall out of date once your role changes.

Where Does the Profit Really Come From?

Two S corporations can report the same profit and still need very different pay decisions.

Take a consulting firm where the owner personally handles most client relationships and does most of the work. Now compare it to one where an experienced team does the delivery and the owner mostly oversees things and brings in new business. The revenue might match. The owner’s contribution to it doesn’t.

So ask how much of your revenue comes from your own work, how much your employees generate, and how much comes from assets or an established operation that would keep running without you.

Here’s a common case. A solo consultant grows the business into a team of eight. Now the owner spends the week managing people, keeping clients happy, and planning what comes next. 



The salary from the solo days was set when the owner did all the billable work, and carrying it forward without a second look doesn’t make much sense. It should be set against today’s role and what comparable work pays, since the business has changed.

Do Your Salary and Distributions Fit Together?

Salary and distributions do different jobs, but you can’t judge one without the other.



If you work in your S corporation, you generally have to be paid reasonable compensation for that work before you take non-wage distributions. When distributions are really payment for services, the IRS can reclassify them as wages.

Look at what came through payroll and what you took out as distributions, and ask whether the split fits your responsibilities and the company’s situation. Compare it to prior years, too. If your distributions have climbed while your salary hasn’t moved, find out why. Bigger profits might explain some of it, but a good year doesn’t prove your salary is reasonable.

There’s no magic ratio to lean on here. What protects you is evidence that supports the number you chose.

Can the Business Afford It?

Changing your pay affects the company’s cash as well as your income.



Before you adjust anything, look at what’s in the bank, which invoices are still unpaid, and what’s coming up for payroll, vendors, debt payments, and planned investments. A company can show a healthy profit and still be tight on cash because customers are slow to pay or because it’s funding growth.

If you’re thinking about a year-end bonus for yourself, weigh the extra payroll cost against the next few months of expenses and the working capital you need. You should be able to justify the pay on tax grounds and still cover your bills.

What Has to Happen Before December 31?

By now you’ve looked at your role, the company’s numbers, your pay history, and your cash. Write down whatever is still open.

Then sit down with your payroll provider or CPA and settle the basics: your salary, withholding, and how everything gets reported. If a year-end bonus is on the table, ask them two things up front. When does it have to be paid, and how will it show up on the books? Timing trips people up here. A bonus you pay in January generally can’t be counted as December wages, even if you decided on it in December.

Keep a file with your duties, the comparable pay data you used, the financial results, and your reasoning. If anyone ever questions the number, that’s what you’ll point to.

The IRS covers the requirements in its S Corporation Compensation and Medical Insurance Guidance.

Look at the Whole Picture Before You Set Your Pay

Before you finalize your salary, line up what your work is worth, how the business is doing, and how much cash you have to back it up. Then confirm the treatment and the timing with your CPA before the year ends.

That’s the kind of review we do with owners at Straight Talk CPAs. Once you can see the numbers side by side, the decision gets a lot easier.

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