S Corp Owners Must Pay Reasonable Salary Before Taking Distributions
Accounting expert David Riggs outlines IRS rules requiring S corp owners to draw fair compensation before shareholder distributions to avoid payroll tax issues.
S corporation owners who take distributions without first paying themselves a reasonable salary risk drawing IRS scrutiny and facing back payroll taxes, according to accounting expert David Riggs, writing in HelloNation.
Under IRS rules, working owners of S corporations are required to receive compensation that reflects the fair market value of the services they perform before any shareholder distributions are issued. The distinction matters because distributions are not subject to payroll taxes, while wages are — creating a financial incentive for owners to minimize salary in favor of distributions, a strategy the IRS has long targeted in audits.
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Riggs outlines the key factors that determine what counts as reasonable compensation, including the nature of the owner's duties, their level of experience, the number of hours worked, and what comparable employees in similar roles would earn in the open market. These benchmarks, he notes, are central to any IRS challenge and underscore why documentation is essential.
Beyond simply setting a number, Riggs emphasizes that owners need contemporaneous supporting records — payroll filings, job descriptions, and market wage comparisons — to defend their compensation decisions if questioned. Without that paper trail, even a well-intentioned salary determination can be difficult to substantiate during an examination.
The guidance is particularly relevant as the IRS continues to focus enforcement resources on small business compliance, making S corp compensation one of the more consequential decisions an owner can make. Continue reading at All Financial Services & Investing.
