How Do I Pay Myself as an S Corp Without Guesswork?

As an S Corp owner, optimizing your salary-to-distribution split can lead to significant tax savings, reducing your self-employment taxes by thousands annually while remaining IRS-compliant. Determining a "reasonable salary" is essential to avoid IRS scrutiny and ensure your S-Corp status is secure. Draw from market data, industry standards, and your business's financial health to establish the appropriate salary. Automated payroll platforms make S Corp compliance effortless by managing calculations, tax filings, and documentation.

You're earning $100,000 as a solopreneur, but $15,300 vanishes into self-employment taxes. Electing S Corp status changes that equation, but it also creates a new challenge: How do you decide your salary without inviting IRS scrutiny or overpaying in taxes?

The key is balance. As an S Corp, every dollar paid as salary gets hit with 15.3% employment tax, while distributions avoid it entirely. Get the split right, and you can save $8,000+ each year while staying compliant with the IRS’s “reasonable salary” requirement.

With Lettuce, you don’t have to guess. We automate payroll, distributions, and filings so you stay compliant and maximize savings. No spreadsheets, no stress.

The Three Ways S Corp Owners Pay Themselves

When you elect S Corp status, there are only three practical ways to take money out of the business: salary only, distributions only, or a mix of salary and distributions. Each path affects your taxes, audit exposure, cash flow, and even benefits, such as retirement contributions.

Here is a thorough look at how each option works and when it makes sense:

1) Salary Only: Maximum Compliance, Highest Payroll Tax Cost

Paying yourself only W-2 wages is the safest approach for IRS purposes. As an owner-employee, you owe the full self-employment tax load on wages, which is 12.4% for Social Security and 2.9% for Medicare, applied to wages up to the Social Security wage base for the Social Security portion, and with Medicare continuing above that.

If you set your reasonable salary at $70,000, the self-employment tax bite is approximately $10,710. That comes out of your pocket, whether it’s labeled as an employee or employer share.

Why some owners pick this:

• Clean, straightforward compliance and a tidy W-2 at year-end.

• Useful when profits are low or uneven. For example, during an early ramp, a modest salary matches what the business can clearly support.

• Helps with practical needs that often require W-2 proof of income, such as mortgages or certain benefits.

• Supports retirement plan deferrals and employer contributions calculated from W-2 compensation, and can also facilitate the proper handling of 2% shareholder health insurance.

Trade-offs to understand:

• Every additional salary dollar is exposed to employment taxes, which caps your savings opportunity.

• Salary reduces pass-through income, which can affect the size of your potential Section 199A qualified business income deduction. In some cases, paying higher wages can help satisfy W-2 wage limits at higher incomes, but for many solopreneurs under the threshold, excess wages simply reduce QBI.

A salary-only arrangement can make sense in specific situations. If your profits are modest, the tax savings from distributions may not justify the complexity, and sticking with wages keeps things simple.

It’s also a solid choice if you want bulletproof compliance or if you’re building a documentation track record before introducing distributions later on.

2) Distributions Only: Big Short-Term Savings, Serious Compliance Risk

Taking only shareholder distributions looks attractive because distributions are not subject to employment taxes. For example, taking $60,000 entirely as distributions avoids roughly $9,180 in payroll taxes compared with treating the same amount as wages.

However, this approach is not compliant. The IRS expects owner-employees who work in the business (that’s you) to take reasonable compensation before any distributions.

Why owners are tempted:

• Immediate cash savings because distributions bypass payroll taxes.

• Simple transfers when cash is available.

Critical constraints and risks:

• Reasonable salary rule: If you materially participate in the business, skipping wages is a classic audit trigger. The IRS can reclassify distributions as wages and assess back payroll taxes, penalties, and interest.

• Stock basis requirement: Distributions are only tax-free to the extent of your shareholder basis, stock basis plus debt basis. Shareholder basis generally equals what you invested plus cumulative profits, minus prior distributions. If you distribute beyond the basis, the excess is taxable.

• Paper trail gap: A K-1 with no corresponding W-2 for an active owner is a red flag on its own.

Distributions-only fits in rare edge cases where you do not perform services for the company and are essentially a passive investor. However, most solopreneurs do not fit this profile.

3) Salary Plus Distributions: The Balanced, Tax-Efficient Strategy

For most S Corp owners, the smartest move isn’t all-or-nothing; it’s combining salary and distributions. Your salary satisfies the IRS’s reasonable compensation requirement and keeps your filings clean, while distributions capture the tax savings that make an S Corp worthwhile. Done right, it’s the best of both worlds: compliance plus thousands in tax savings.

Why the split works:

Every dollar classified as salary gets hit with the full 15.3% employment tax. Every dollar classified as a distribution bypasses it completely. If you only pay yourself a salary, you guarantee maximum taxes. If you only take distributions, you guarantee IRS scrutiny. The split threads the needle, showing the government you’re paying yourself fairly while keeping a meaningful portion of your income out of payroll tax reach.

What the numbers look like in practice:

Imagine your business earns $100,000 in profit. You set your salary at $50,000 and take the remaining $50,000 as distributions. On the salary portion, you’ll owe about $7,650 in employment taxes. On the distribution portion, you’ll owe zero. Compared to salary-only, that’s $7,650 still in your pocket. Shift the ratio and the numbers move:

• A 40/60 split drops payroll taxes to about $6,120 and boosts savings to $9,180.

• A 60/40 split raises payroll taxes to about $9,180, but still saves you $6,120 compared with salary-only.

The math changes, but the principle is the same: more distributions mean more savings, as long as your salary remains defensible.

The bigger picture:

This balanced approach does more than reduce taxes. It also:

• Preserves flexibility, salary is steady, but you can time distributions when cash flow is strong.

• Supports retirement contributions and health insurance deductions that rely on W-2 wages.

• Reduces audit risk dramatically compared with distributions-only, while still putting thousands back into your pocket.

Think of it this way: the salary and distribution split is not just a tax tactic, it’s your compensation strategy. Salary keeps the IRS comfortable. Distributions keep your wallet comfortable. The win comes from striking a balance where both are true.

How to Nail Your 'Reasonable Salary': IRS Factors and Smart Strategies

The IRS doesn’t hand out a formula for reasonable S Corp compensation, but it does give you a framework. They consider your training, duties, time devoted to the business, and financial performance. In practice, the test is simple: What would you pay someone else with your skills in your market to do the same job?

There are three common approaches you can use to back up your salary decision:

The Cost Method

This is the most straightforward. Research what professionals like you earn in your city using salary surveys, industry reports, and job boards. For example, mid-level designers in Denver might average $52,000–$65,000, making $58,000 a defensible salary once you factor in specialized skills or long-standing client relationships.

The Market Method

The market method takes a broader view. Instead of just looking at individual salaries, you compare your compensation to what small firms or consultancies charge for similar work. This helps show that your pay aligns with what the market values for comparable services, not just a random number.

The Income Method

Here, your business profitability sets the benchmark. A thriving design practice pulling in $150,000 can justify higher compensation than one making $80,000. The IRS recognizes that a reasonable salary depends not only on the work performed but also on what the business can afford to pay.

Putting It All Together

No single method is perfect on its own, but combining them gives you a strong, defensible number. From there, refine your salary based on your overall tax strategy. In Texas, a $45,000 salary on $100,000 of profit maximizes distributions. In California, where distributions face a 9.3% state tax, bumping your salary to $55,000 may actually leave you ahead. Whatever figure you land on, document your process with surveys, time logs, and research so you’re audit-ready.

With Lettuce, you don’t just set a number and hope it works. Lettuce calculates your salary using IRS guidelines, industry benchmarks, and your actual income, then balances it against the common 60/40 split to maximize distributions without crossing compliance lines. As your business evolves, payroll, tax withholdings, W-2s, and filings all run automatically, so you stay audit-ready and focused on your work, not spreadsheets.

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Frequently Asked Questions About S Corp Compensation

Managing S Corp payroll raises practical questions that every ambitious solopreneur needs answered.

Can I change my salary mid-year if my business income goes up or down?

Yes. You can adjust your salary to match actual business performance, as long as your total annual pay still qualifies as reasonable compensation. Just document why you made the change.

What if I accidentally miss a payroll run, and how do I correct it?

Run a catch-up payroll as soon as possible to cover the missed period. As long as your total annual salary meets IRS standards, one slip won’t derail compliance.

How do I handle distributions if my business has a slow month?

Distributions are optional. You can skip them during slow months and take them later when profits and stock basis allow. You can also reduce salary if profits slow.

Is quarterly or monthly payroll better for cash flow and compliance?

Quarterly payroll reduces paperwork and lines up with IRS deadlines, making it a good fit for solopreneurs with variable income. Monthly payroll works well for steady income but requires more frequent processing.

What happens if I don't have enough cash to cover payroll and taxes?

Prioritize salary over distributions, since the IRS requires reasonable wages. Set aside 30–40% of revenue for payroll and taxes to smooth cash flow, and take distributions only when funds allow.

What if I don't want to handle all this myself?

You don’t have to. Automated payroll platforms handle calculations, filings, and documentation so you stay compliant without juggling spreadsheets and deadlines.

Balancing Salary and Distributions Without the Stress

The math is straightforward: salary-only costs you in taxes, distributions-only risks an audit, and the balanced split delivers savings with compliance. The real challenge isn’t knowing the rules; it’s managing the details month after month.

That’s where automation changes the game. Instead of late-night spreadsheets or costly accountant fees, modern tools handle payroll runs, tax filings, and documentation so you can stay focused on your business.

Get started today with Lettuce and see how simple it can be to pay yourself as an S Corp.