S Corp Owners Must Set Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines how S corp owners can manage payroll taxes through proper salary and distribution strategies.
S corporation owners who take money from their business face a requirement that is often misunderstood: they must pay themselves a reasonable salary before drawing shareholder distributions, according to accounting expert David Riggs, writing in HelloNation.
The distinction matters because salaries are subject to payroll taxes while distributions generally are not. Business owners who skip or minimize their salary in favor of distributions risk scrutiny from the IRS, which looks at the compensation structure of working owners as a key audit trigger.
Read more Underinsured Motorist Coverage: What Drivers Need to Know →
Riggs outlines several factors that determine what qualifies as reasonable compensation, including the owner's specific duties, level of experience, hours worked, and what comparable employees in similar roles would earn in the open market. These benchmarks are not arbitrary — they reflect standards the IRS applies when evaluating whether a salary is defensible.
Documentation is central to the strategy. Riggs emphasizes that salary decisions need supporting records to withstand any regulatory review. Without proper paperwork, even a well-intentioned compensation structure can become difficult to defend. Owners are advised to establish a consistent, documented rationale tied directly to the nature of their role within the business.
The guidance is particularly relevant for small business owners who use the S corp structure specifically to reduce self-employment tax liability, a legitimate planning tool that becomes problematic only when taken to an extreme without proper support. Continue reading at All Financial Services & Investing.
