S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines how S corporation owners must handle compensation to stay compliant with IRS payroll tax rules.
S corporation owners who pay themselves too little in salary before taking shareholder distributions risk triggering IRS scrutiny, according to accounting expert David Riggs, who addressed the issue in a recent HelloNation feature on owner compensation strategies.
Under IRS rules, working owners of S corporations are required to receive what the agency considers "reasonable compensation" before drawing any distributions from the business. The distinction matters because wages are subject to payroll taxes while distributions are not, creating a financial incentive for owners to minimize salary — a practice regulators actively monitor.
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Riggs outlined several factors that go into determining what qualifies as reasonable, including the owner's specific duties within the company, relevant professional experience, total hours worked, and what comparable businesses pay for similar roles. These benchmarks are not arbitrary; they form the evidentiary foundation that can protect an owner during an audit.
Documentation is central to the expert's guidance. Salary decisions that lack supporting records — such as written job descriptions, time logs, or compensation analyses referencing industry data — leave owners exposed if the IRS challenges the figures. Proper recordkeeping transforms a compensation choice from a liability into a defensible business decision.
The broader takeaway for S corporation owners is that the salary-versus-distribution structure offers legitimate tax advantages, but only when the compensation side of the equation is handled with care and backed by contemporaneous evidence. Continue reading at All Financial Services & Investing.
