If you're an S corporation owner, one of the trickiest—but most important—decisions you'll make is how much to pay yourself.

Too high? You could be handing over more in payroll taxes than necessary. Too low? The IRS might come knocking.

As a tax advisor, I've seen firsthand how this balance can make or break your financial strategy. So let’s walk through what it takes to get it right—and protect yourself in the process.

Why Salary Matters

S corp owners are unique. You’re not just collecting profits—you’re also considered an employee. That means you’re required to take what the IRS calls a “reasonable compensation” for the work you do.

But here’s the gray area: the IRS doesn’t define exactly what “reasonable” is. That’s why many owners either overpay out of fear, or underpay and risk an audit.

How to Find the Sweet Spot

To defend your salary in the event of an audit, you need more than just a number—you need documentation.

Here’s what I advise my clients to gather:

• Comparable salaries for your role and industry (try salary databases or job postings)

• A clear breakdown of duties and hours worked

• Any credentials, experience, or certifications you bring to the table

• The company’s financial condition—can it actually afford more?

Once you’ve got that info, you can determine a fair salary—and justify it with confidence.

The Bonus: Lower Payroll Taxes

Here’s where it gets powerful: once you’ve set that reasonable salary, any profits beyond that can be taken as distributions—not subject to self-employment tax.

That’s the sweet spot. You save on taxes, stay compliant, and sleep well at night.

Bottom Line

If you’re unsure whether your salary could raise red flags, it might be time to review it. Getting this part right isn’t just about playing defense—it’s a chance to optimize your tax strategy and build a more audit-proof business.

Want to chat about your setup? Reach out—I’d be happy to help you run the numbers.