How S Corp Owners Should Set Salary vs. Distributions
Accounting expert David Riggs breaks down how S corp owners must handle reasonable compensation before taking shareholder distributions.
S corporation owners who actively work in their businesses face a specific IRS requirement: they must pay themselves a reasonable salary before drawing shareholder distributions, according to accounting expert David Riggs, who recently addressed the topic through HelloNation.
The distinction matters because salaries are subject to payroll taxes while distributions are not. The IRS has historically scrutinized S corp owners who minimize their salaries to reduce payroll tax liability, making the reasonable compensation standard a frequent audit trigger for small business owners.
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Riggs outlined the key factors that determine what qualifies as reasonable compensation, including the owner's job duties, professional experience, hours worked, and what comparable employees in similar roles earn in the open market. Each of those elements, taken together, forms the basis for a defensible salary figure.
Documentation is central to the strategy. Riggs emphasized that salary decisions require supporting records, not just a number entered on a payroll form. Without clear records showing how the compensation figure was derived, an owner is vulnerable if the IRS challenges the amount.
For S corp owners navigating compensation planning, the core takeaway is that distributions are a tax advantage available only after legitimate payroll obligations are satisfied — not a substitute for them. Continue reading at All Financial Services & Investing.
