If you own an S Corporation or an LLC taxed as an S Corp, you can generally pay yourself through a reasonable salary and profit distributions. The most strategic approach blends the two—meeting IRS rules while minimizing taxes, protecting audit defense, and building long-term wealth.
How you pay yourself is more than a bookkeeping decision—it’s a wealth-building strategy. The right balance of salary and distributions can reduce your tax burden, increase your retirement contributions, and free up cash for growth. Over time, this proactive approach can raise your business’s valuation for a future sale or succession.
Use industry benchmarks and your role’s market rate. The IRS expects active S Corp owners to take a reasonable wage—skip this, and you risk audits and penalties.
Once you set your salary, take the remaining profits as distributions. This reduces payroll tax exposure while maintaining compliance.
Your salary affects the maximum you can contribute to certain retirement accounts. A higher salary may allow greater pre-tax savings—boosting your wealth while lowering taxable income.
Market conditions, profitability, and your growth plans change. Review your pay structure at least once a year to ensure it supports your business and personal wealth goals.
(Hypothetical Illustration)
Consider a fictional business owner, “Michael,” who runs a dental practice in Texas, generating about $1.2M in annual revenue. In this hypothetical example, he pays himself $40,000 in salary and $160,000 in distributions.
If an advisor reviewed this structure, they might find:
By adjusting the salary to $80,000, keeping $120,000 in distributions, and reinvesting $40,000 into the practice, this hypothetical business owner could lower audit risk, reduce taxes, and improve business value for a future sale.
Unlike many firms that only calculate payroll, Business Advisory and Accounting Partners integrates tax, operational, and financial planning into a single strategy. With a commercial banking background, Practice Forward methodology, and decades of tax expertise, we ensure your pay structure supports your current needs and long-term wealth goals—not just compliance.Get proactive about your business now – Schedule your Advisory Fit Meeting.
It’s the market rate you’d pay someone else to do your job, based on role, experience, and industry standards.
No. If you actively work in the business, the IRS requires reasonable salary via payroll.
Certain retirement plans calculate contribution limits based on salary. A higher salary can increase your allowable contributions.
At least annually, or whenever profits, role, or business goals shift.
No. Different rules apply—consult with a trusted advisor.
It minimizes taxes while ensuring compliance and supporting wealth-building strategies.
We integrate tax, operational, and financial planning to align compensation with growth, retirement, and succession goals.
Yes. Setting a salary in line with IRS expectations reduces red flags.
Not necessarily—strategic planning can maintain healthy cash reserves while increasing salary.
B.A.A.P. combines national reach with deep strategic insight, ensuring your compensation strategy works for both tax savings and long-term value.
