How to pay yourself in an S-Corp
icon June 25, 2025
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Business Tax, Payroll Setup, S-Corporation

How do S Corporation owners pay themselves legally and efficiently? In this video, we break down the difference between salary and distribution, and explain exactly how to pay yourself as an S Corp owner, while staying compliant with IRS rules.

Whether you’re a small business owner, freelancer, or run an LLC taxed as an S Corp, understanding how to balance W-2 wages and shareholder distributions is crucial for tax savings and legal compliance.

🔍 In this video, you’ll learn:

  • What the IRS requires for reasonable compensation
  • How to calculate your S Corp salary
  • How distributions work and when they’re taxed
  • Salary vs. distribution: What’s better?
  • Common mistakes S Corp owners make
  • Tips to avoid IRS red flags and audits

💼 This video is perfect for:

  • S Corporation owners
  • LLCs taxed as S Corps
  • Small business owners
  • Entrepreneurs and tax-savvy professionals

📞 Need expert help with your S Corp setup or payroll strategy?

Click here to schedule a consultation with our team with Carmen Huertas.

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⚠️ DISCLAIMER

This video is intended for education purposes and should not be taken as legal, financial or tax advice.  You should consult with a professional about your unique situation before acting on anything discussed in these videos.  Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but it cannot give blanket advice to a broad audience.  Things are always changing, therefore, this channel may not contain the most up-to-date information.  Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.

TRANSCRIPTION

Congratulations, you are on your way to reducing your tax liability. Your election has been approved and your business is now an S-Corp. How does this change things when it comes down to paying yourself and other officers in the business? In this video, that’s what we’re going to be diving into in order to shed some light on this topic.

Our dear viewers, welcome back to the channel. If you’re an officer or owner of an S-Corporation, you’re probably wondering or you should be wondering, how am I supposed to pay myself? This is a super important topic because if you do it wrong, the IRS could come knocking. In this video, we’re going to attempt to explain to you what the IRS expects from S-Corp officers, what reasonable compensation means, how to pay yourself properly through payroll, and how to combine salary with distributions.

First of all, let’s clarify one thing. When you form an S-Corporation, you’re not just the business owner anymore. You’re also considered to be an employee of your company if you’re actually working in it and you’re not a passive owner.

According to the IRS, if you’re providing services to your S-Corp, then you must pay yourself a reasonable salary through payroll, just like you would pay any other employee. This means that your pay will be subject to the withholding of federal and state income taxes. You will be subject to payroll taxes like Social Security and Medicare.

You will be filing payroll tax forms like the 941, W-2s, W-3s, etc. And no, you can’t just take money out of the business without paying yourself a proper salary first. Why is that? Well, because the reason S-Corp tax treatment is so attractive to begin with is because the profits are not subject to self-employment taxes.

In other words, you save 15.3% on your profits. But the idea of the strategy is not for you to evade these taxes altogether, but rather so you only pay them on your salary and not on all of the business profits unnecessarily. The IRS wants to make sure that you’re not avoiding employment taxes by only taking owner distributions.

In this video, we are only going to address the owner’s salary or salaries. If you have people working in your business that fall into the definition of employee and not subcontractors, then they need to be on payroll as well. That’s actually a good idea for another video.

What’s the difference between an employee and a subcontractor? I’ll keep that in mind. Now, let’s talk about the biggest question. What exactly counts as reasonable compensation? Unfortunately, the IRS doesn’t give a specific number, but they do give us guidelines.

A reasonable salary should be what you would pay somebody else that you hire to do your job in your business. Here are some factors you should consider. What are your duties and responsibilities? What’s your experience and your qualifications? What time and effort do you put into the business? And what similar businesses pay for similar roles in your area? The company’s gross income and profitability is another thing you should consider.

So let’s take a look at an example. Say you’re running an accounting office and you’re doing all the work yourself, and someone in your role typically earns maybe about $90,000 a year. Then that means an $18,000 annual salary isn’t going to cut it.

There have been court cases where the owners were penalized for taking unreasonably low salaries and large distributions instead, because the IRS knows the game. We have seen many audits over this. I specifically remember a physician that we were warning for years that he needs to take a reasonable salary.

It was required by law. We warned the individual that a physician, a $20,000 annual salary was way too low with a business netting over $200,000 in profits. So think about it.

Payroll taxes on a $20,000 salary is $3,060. The salary should have been more like $100,000, which would pay $15,300 in payroll taxes. That would still leave around $90,000 of the profits that are not subject to payroll taxes.

So you’d still be saving $13,770 even if you paid yourself a reasonable salary. You better believe the IRS will pursue that difference. So it’s better to play it safe and, well, be reasonable.

Pay yourself fairly. Now, here’s where S-Corps can really be valuable. After you establish and pay yourself a reasonable salary, you can take distributions of the remaining profits.

And those are not subject to the self-employment tax. And that’s where you save 15.3%. This is the main tax benefit of being an S-Corp owner. So the usual approach is you run payroll for yourself, whether it’s monthly, bi-weekly, whatever you choose.

You withhold taxes and pay employer taxes. Take distributions of the remaining profit after your salary and expenses. So let’s take a look at another example.

Say your S-Corp makes $120,000 in profit. So you pay yourself a $60,000 salary. The remaining $60,000 can be taken as owner distributions that are not subject to the payroll tax.

This saves you thousands in taxes legally, but only if you set the reasonable salary first. So to pay yourself correctly, you’re going to need to set up a payroll account. That means registering with the IRS and state tax agencies.

You’re going to have to file Form 941 quarterly, and this is to report federal payroll taxes. You’re going to have to issue yourself a W-2 at the end of the year. And using payroll like software or a service like Gusto or ADP, QuickBooks, there’s a lot of companies out there, can really help the process.

It takes a bit of a setup, but once it’s in place, it keeps you compliant and it helps you avoid tax penalties. And especially if you’re currently doing it all manually or as a one-person operation, using a payroll service can really simplify things. And even more so if you have multiple employees.

Okay, now, so here are some common mistakes S-Corp owners make. You only take distributions and you skip the payroll altogether. You set an unrealistically low salary for yourself.

Paying contractor payments to themselves instead of running the payroll. Missing payroll tax filings. All of these things can trigger IRS audits and back taxes plus the penalties.

So if you’re unsure about what your salary should be, you should consult a CPA, an accountant, or use industry compensation data sites like Glassdoor or the Bureau of Labor Statistics. So let’s do a quick recap. If you are working actively in your S-Corp, you must pay yourself a salary.

You may get away with not doing so for a few years, but it will catch up to you. That salary must be reasonable and based on your role and industry. Once that’s done, you can take tax redistributions of the remaining profits and always use payroll software or a service to stay compliant.

And when in doubt, talk to a tax professional. Paying yourself the right way protects your business, keeps the IRS happy, and helps you take full advantage of the S-Corp tax benefits. So thank you for watching once again.

If you found this video helpful, please don’t forget to like, subscribe, and leave any questions that you have in the comments. And of course, share it to anybody who you think would benefit from it. See you guys next time.

Summary: How to Pay Yourself in an S Corp (Salary vs Distribution)

When your business elects to be taxed as an S-Corporation, it unlocks a powerful strategy for reducing tax liability—but only if handled correctly. In this video, Tax Accounting Advisor Carmen Huertas explains how S-Corp owners must properly pay themselves a reasonable salary through payroll and then take distributions from the remaining profits.

A common mistake is skipping payroll entirely and taking only distributions, which can trigger IRS audits and lead to penalties. According to the IRS, if you’re actively working in your S-Corp, you must be treated as both owner and employee. That means issuing yourself a salary that reflects your job duties, industry norms, experience, and time commitment. Only after that can you take tax-free distributions of profit.

For example, if your S-Corp earns $120,000 and you pay yourself a $60,000 salary, the other $60,000 can be taken as distributions—saving you 15.3% in payroll taxes on that second half. But if your salary is too low, you risk audit exposure.

How to pay yourself in an S Corp

Carmen outlines steps for staying compliant, including setting up payroll with IRS/state accounts, using software like Gusto or QuickBooks, filing Form 941 quarterly, and issuing W-2s. She also identifies common red flags like paying yourself as a contractor or setting salaries that are too low.

Ultimately, paying yourself the right way protects your business and helps you enjoy the full benefits of S-Corp taxation. Consult a CPA and use compensation benchmarks to determine the right numbers for your role.

Learn More

About Freedom Tax Accounting

At Freedom Tax Accounting, we specialize in helping individuals, entrepreneurs, and small business owners across Central Florida—and beyond—maximize their financial potential with smart, compliant strategies. Since day one, our mission has been to provide honest, expert tax and accounting services rooted in integrity, faith, and client-first values.

Whether you’re forming an S-Corporation, navigating payroll setup, or planning your year-round tax strategy, our experienced advisors are here to guide you every step of the way. Located in Kissimmee, Florida, we serve clients locally and nationwide with personalized attention and professional expertise you can trust.

Ready to get your S-Corp compensation strategy right?

 📞 Call us at 407-344-1012 or visit freedomtaxaccounting.com to schedule your consultation today.

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