S-Corp Reasonable Salary Calculator

S-Corp Reasonable Salary: What You Need to Know

One of the biggest advantages of operating as an S-Corporation is the ability to split your business income between a reasonable salary and distributions. While your salary is subject to FICA payroll taxes (Social Security and Medicare), distributions are not. This can result in significant tax savings compared to operating as a sole proprietorship, where all net earnings are subject to self-employment tax.

What Is Reasonable Compensation?

The IRS does not define a specific dollar amount or percentage that qualifies as reasonable compensation. Instead, they look at several factors: the duties you perform, your training and experience, the time and effort you devote to the business, comparable salaries for similar positions in your industry and geographic area, and the overall financial performance of your company. Courts have consistently upheld the IRS's position that S-Corp owners must pay themselves a fair market salary before distributing profits.

How This Calculator Works

This tool estimates a reasonable salary range based on your industry, experience level, location, and hours worked. It starts with an industry-specific base percentage of your net profit, then adjusts for experience (up to +10%), location cost of living, and part-time hours. The result is clamped between 30% and 70% of profit, which aligns with the range most tax professionals and the IRS consider defensible.

FICA Tax Savings with an S-Corp

As a sole proprietor, you pay self-employment tax of 15.3% (12.4% Social Security plus 2.9% Medicare) on your entire net earnings. As an S-Corp, you only pay FICA on your salary, not on distributions. For example, if your business earns $150,000 and you set a reasonable salary of $80,000, you save FICA taxes on the $70,000 distributed to you. At 15.3%, that is over $10,000 per year in tax savings.

Risks of Setting Your Salary Too Low

The IRS actively audits S-Corps that pay unreasonably low salaries. If your company earns $200,000 and you pay yourself a $30,000 salary while taking $170,000 in distributions, the IRS can reclassify those distributions as wages. This means you would owe back payroll taxes, interest, and penalties. Several high-profile tax court cases have reinforced that S-Corp owners who perform substantial services must receive reasonable compensation.

When to Consult a Professional

While this calculator provides a solid starting point, your actual reasonable salary depends on facts and circumstances unique to your situation. A qualified CPA or tax advisor can help you document your salary determination, which is critical in the event of an audit. Many professionals recommend conducting a formal reasonable compensation study, especially for businesses with profits above $100,000.