Set a reasonable S corp salary
Explore with diligence: legitimate, needs careful checks.
If you own an S corp and work in it, the IRS expects you to pay yourself a reasonable salary before you take distributions. Salary carries Social Security and Medicare; distributions don't. That makes the salary one of the biggest tax decisions an S corp owner makes each year.
Set it too high and you pay payroll tax you didn't need to. Set it too low and the IRS can treat your distributions as wages, with back taxes and penalties. The goal is the lowest salary you can defend with evidence.
How it works
An S corp owner who works in the business pays themselves a salary, which carries payroll tax, and takes the rest as distributions, which don’t. A lower salary saves payroll tax; too low invites the IRS to reclassify distributions as wages. Cratchit suggests the lowest salary you could defend from your hours and the work you do, on each company’s page under Your businesses, and keeps the monthly record that backs it.
How Cratchit sets it: the Harpers
Mark Harper runs Harper Restoration Group, an S corp in the Cratchit demo, and pays himself $120,000 a year. Cratchit looks up what a general and operations manager in North Carolina is paid, using the Bureau of Labor Statistics' wage survey at the low end of the range, and shows a defensible salary starting around $66,800.
It keeps the record that backs the number: the role, the wage data, its date and source. Whether Mark lowers his salary is his decision with his CPA, but he can see what the evidence supports and what it would mean for his payroll tax.
Look up a defensible salary for your job and state →
What makes it hold up
- What similar roles are paid locally (a salary study or job listings)
- The hours and duties you actually perform
- Payroll run on a regular schedule
Risks
Moderate. The IRS can recharacterize distributions as wages, with back payroll tax and penalties. A salary that’s a small share of profit is a common audit flag.
Questions to ask your CPA
- What salary is defensible for my role?
- How does salary change my retirement contributions and the 20% business income deduction?
Common questions
What counts as a reasonable salary?
Roughly what you'd have to pay someone else to do the work you do, given your duties, your hours and local pay. Salary surveys, job listings and government wage data are the usual evidence.
Can I pay myself no salary and take only distributions?
Not if you work in the business. The IRS can reclassify distributions as wages when an owner who provides real services takes little or no salary.
Does my salary affect my retirement contributions?
Yes. In an S corp, the company's retirement contribution is figured on your W-2 salary, not on profit, so a very low salary also limits what the company can put away for you.
How often should I revisit it?
Each year, and whenever your role, hours or the business change. Keeping a dated record of how you set it is what makes it hold up.
Cratchit runs every strategy in this library against your real numbers, rates it, and keeps the records that make it hold up. Take a guided tour with the Harpers, a sample family.
Try the demoRelated strategies
Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.