Owners’ Compensation in S Corporations

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May 8, 2006 by Dane Carlson | 1 Comment

The Accounting Blog:

All business owners face an interesting challenge: how to take profits out of the company and pay the least amount of taxes in the process. If you have an S corp., there are basically two ways you can get money out of the company: by paying yourself salary or by paying yourself distributions. The big difference, of course, is that distributions are tax-free and far more flexible (i.e. the company simply writes you a check). Meanwhile, salaries are subject to employment taxes (approximately 15%) and the usual payroll-related bureaucracy (withholding, etc.).

So why don’t business owners simply take 100% of their profits as distributions and forget salary altogether? The reason can be summed up in three words: reasonable compensation rules. If you own an S corp., the IRS has guidelines governing how much you are supposed to pay yourself.