Pass-through taxation
S-corp income flows to your personal return. You pay income tax once — no entity-level corporate tax, unlike a C-corp.
Through Reese CPA
S-corp tax planning for owner-operators.
Getting the most out of your S-corp election comes down to one question most owners get wrong: how much should you pay yourself? We build the analysis, document the rationale, and make the W-2 vs distribution split work in your favor.
The S-corp election
What the S-corp election actually does — and when it stops making sense.
The S-corp election is a tax status, not a business structure. It changes how your business income is taxed — specifically, how much of it is subject to self-employment taxes. The savings are real, but so are the conditions.
Self-employment tax savings
The key benefit: distributions above your W-2 salary aren't subject to the 15.3% self-employment tax. But only if the salary is reasonable.
When it stops making sense
At very low net profit (typically under $40–50K), the S-corp overhead — payroll, extra filings, state fees — can exceed the tax savings. The math changes with scale.
Other tradeoffs
S-corps have restrictions: one class of stock, limits on shareholders, no corporate shareholders. These matter if you're raising capital or planning a structured exit.
Reasonable compensation
The IRS has an opinion on your salary. You should have a better one.
The IRS requires S-corp owner-employees to pay themselves a “reasonable compensation” — a salary comparable to what you’d pay someone else to do your job. Pay too little and you risk reclassification of distributions as wages, back payroll taxes, and penalties. Pay too much and you’ve given back the FICA savings the S-corp was supposed to create.
Reasonable compensation isn’t a single number. It’s determined by your industry, geographic market, revenue, owner involvement, and comparable compensation data. We build the analysis, keep the documentation, and set payroll to a defensible number — not a guess.
How we determine your salary
Industry comparable data
We reference BLS, RSMeans, and compensation surveys for your role and market — the same sources the IRS auditors use.
Owner time and duties
If you spend 20% of your time on the business, that matters. We document your actual involvement to support the salary decision.
Business revenue and complexity
A $5M business warrants a different comp analysis than a $500K one. We scale the analysis to your actual situation.
Audit risk assessment
We flag compensation decisions that fall well below market — the most common trigger for IRS scrutiny of S-corp owners.
W-2 vs distributions
The math behind the W-2 and distribution split.
The S-corp tax benefit is straightforward: self-employment (FICA) taxes apply only to W-2 wages, not distributions. At 15.3% combined employer/employee rate, shifting income from wages to distributions produces real savings — up to the Social Security wage base.
The tradeoff is that the salary must be defensible. At $300K net profit, the right split could save $10,000–$20,000+ annually versus taking a minimal or no salary. But too low a salary creates audit exposure that offsets the savings.
- FICA rate on W-2
- 15.3% combined (employer + employee) up to Social Security wage base
- Rate on distributions
- 0% FICA — ordinary income tax only, no employment tax
Illustrative example
$300K net profit. Two salary decisions. Meaningfully different tax bills.
High salary (no planning)
$220,000 W-2
FICA on most of net profit
Planned split
$110,000 W-2
+ $190K distribution — FICA only on wage
Illustrative only. Actual reasonable compensation depends on role, industry, and IRS comparable data. This is not tax advice.
QBI deduction
The S-corp and the QBI deduction interact — and it’s not always obvious.
The Section 199A qualified business income (QBI) deduction allows eligible owners to deduct up to 20% of qualified business income. S-corp owners can claim it — but once income exceeds the threshold, a W-2 wage limitation kicks in.
Above the phase-out, your QBI deduction is capped at the greater of 50% of W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of qualified property. This creates a direct tradeoff: a higher salary expands the QBI deduction but also increases payroll taxes. The optimal salary balances both.
Key QBI planning considerations
- QBI deduction eligibility depends on business type — specified service trades have phase-outs
- W-2 wage limitation applies above ~$383K (MFJ) in 2024 — the salary level affects your deduction cap
- Increasing salary to expand QBI deduction must be weighed against higher FICA cost
- S-corp owners can claim QBI on the net of income minus deductible portion of SE tax equivalent
- Coordination with retirement plan contributions (which reduce QBI) can shift the optimal salary
Entity review
When to reconsider your entity structure.
The S-corp election that made sense at $250K in revenue may not be optimal at $2M, before a sale, or after adding partners. Entity structure is a planning decision that should be revisited as your business evolves.
Net profit below $40–50K
Payroll setup, quarterly payroll filings, additional state fees, and a more complex return can cost more than the FICA savings at lower income levels. Run the numbers before assuming the election still makes sense.
Planning a capital raise
S-corps are limited to one class of stock and 100 shareholders, with no corporate or non-resident alien shareholders. If you're considering outside investment, a C-corp structure may be required.
Preparing for a business sale
The tax treatment of a business sale varies significantly by entity type and deal structure. S-corps offer advantages in asset sale scenarios (single level of tax), but the right structure depends on buyer preferences and deal terms.
Multi-owner businesses with different needs
S-corp distributions must be proportional to ownership. If owners need different compensation arrangements or equity classes, an LLC taxed as a partnership offers more flexibility.
Get started
Ready to get your S-corp compensation right?
We start with a 30-minute call to review your current structure, run the reasonable compensation analysis, and identify what the optimal W-2 and distribution split looks like for your business.
Tax services provided through Reese CPA. This page is educational and does not constitute tax advice.