Reasonable salary: the number that makes or breaks your S-corp
The short answer
Your S-corp salary must be what you'd have to pay someone else to do your job — a facts-and-circumstances standard built on your role, hours, expertise, and local market wages. There is no safe percentage: the "50/50 rule" and "60/40 rule" are internet folklore. Set the number with comparable wage data, write down how you got it, and revisit it annually — because when the IRS wins these cases, it wins on missing documentation, not on math.
How the number is actually built
- Inventory your roles. Most owners are several employees at once — the technician, the salesperson, the bookkeeper, the manager. Each slice has a market wage.
- Pull comparables: wage data for those roles in your metro, scaled to the hours you actually spend on each.
- Adjust for reality: part-time effort, unique expertise, capital the business uses versus labor you provide.
- Document it in a memo dated when the salary was set — the comparables, the hour allocation, the conclusion.
- Coordinate the trade-offs: salary drives payroll tax up, the Solo 401(k) employer contribution up, and the QBI deduction down. The optimum is one calculation across all three.
Where owners get it wrong
- Copying a ratio from a forum instead of pricing the actual job
- Paying $24,000 to a surgeon-owner grossing $900,000 — the profile examiners are trained on
- No memo, no comparables, nothing contemporaneous when the exam letter arrives
- Never revisiting the number as the business triples
Frequently asked questions
Is there a safe percentage, like 50/50 or 60/40?
No. The percentage rules floating around online are folklore — the standard is what you'd pay someone else for your role, hours, and market. A ratio that ignores your actual job is exactly what examiners flag.
What data supports a reasonable salary?
Comparable wage data for your role and region (BLS data, industry surveys, compensation studies), adjusted for your hours and responsibilities, documented at the time you set the salary — not reconstructed later.
Can my salary change year to year?
Yes — and it should, as profit, hours, and roles change. An annual salary review memo is cheap insurance.
What happens if the IRS decides my salary was too low?
Distributions get reclassified as wages: back payroll taxes, penalties, and interest — often years later, all at once. Documentation at the time is what prevents the reclassification.
Want a documented salary study?
We build the comparables, the memo, and the QBI/retirement optimization in one engagement — a defensible number instead of a guess.
Book a free consultation