If you own an S-Corporation, one of the most important rules you need to understand is something called “reasonable salary.” This is where a lot of business owners make mistakes. Some pay themselves too little to save on taxes, while others don’t understand the rule at all. Both can cause problems with the IRS.
What Is a Reasonable Salary?
A reasonable salary is the amount you pay yourself for the work you do in your business.
If you actively run your company, the IRS expects you to pay yourself like an employee. This salary should reflect what someone else would earn doing the same job. It doesn’t have to be exact, but it needs to make sense based on your role and industry.
Why the IRS Cares About This
With an S-Corp, you don’t pay self-employment tax on all your profits. Instead, you split your income into salary and profit. Your salary is taxed normally, but your remaining profit is not subject to self-employment tax.
This is where people try to take shortcuts by paying themselves a very low salary to reduce taxes. The IRS watches for this and can step in if it looks unrealistic.
What Happens If Your Salary Is Too Low
If the IRS believes your salary is not reasonable, they can reclassify your income. This means they may treat your profit as wages and charge back taxes, penalties, and interest. In some cases, it can trigger an audit. Trying to save a little on taxes can end up costing you much more.
How to Know What Salary Makes Sense
There’s no fixed number, which is why this confuses people. Your salary depends on your industry, your experience, the work you do, and how much your business earns. A business owner doing most of the work should expect to pay themselves more than someone who has a full team handling operations.
Looking at market rates for similar jobs is a good starting point, but your actual situation matters just as much.
Final Thoughts
A reasonable salary is not just a suggestion. It’s a rule that can affect your taxes and your risk with the IRS. If you set it too low, you could face penalties. If you set it correctly, you can still save money while staying compliant. The goal is not to push the limits. It’s to do it the right way.
How Local Tax Can Help
At Local Tax, we help S-Corp owners in Bellflower and across Los Angeles County set a reasonable salary that makes sense and keeps them protected.
We review your business, your role, and your income to help you find the right balance between saving on taxes and staying compliant with IRS rules. We also handle payroll and bookkeeping, so everything is done correctly from the start.
Local Tax
9429 Somerset Blvd, Bellflower, CA 90706
(562) 925-2203
