S-Corp Salary vs Distribution: A Plain-English Guide
If you've set up an S-Corp (or your accountant told you to), you've probably heard that you can "save on taxes" by paying yourself a mix of salary and distributions. That's true — but the details matter, and getting it wrong can trigger an IRS audit.
Let's break it down in plain English.
The Basic Idea
As an S-Corp owner, your business profit can come to you two ways:
- Salary (W-2 wages): Subject to FICA taxes — that's 15.3% for Social Security and Medicare
- Distributions: Not subject to FICA taxes, only income tax
The tax savings come from shifting some of your income from the salary bucket (taxed at ~15.3% extra) to the distribution bucket (no FICA). On $50,000 shifted to distributions, that's roughly $7,650 saved per year.
The IRS "Reasonable Salary" Rule
Here's the catch: the IRS requires you to pay yourself a reasonable salary before taking distributions. You can't pay yourself $10,000 in salary and take $200,000 in distributions. That's a red flag.
What counts as "reasonable"? The IRS looks at:
- What similar roles pay in your industry and region
- Your experience, education, and duties
- How much time you spend on the business
- What the business can afford
A good rule of thumb: your salary should be at least 40–60% of your total compensation, depending on your industry. A solo consultant billing $200k might pay themselves $80–100k in salary. A retail shop owner earning $80k might set salary at $45–55k.
How to Find Your Optimal Split
- Research comparable salaries on sites like the Bureau of Labor Statistics or Glassdoor
- Start with a defensible salary — err on the side of slightly higher, not lower
- Calculate your FICA savings at different split points
- Factor in retirement contributions — higher salary means higher 401(k) contribution limits
- Document your reasoning — if the IRS ever asks, you want a paper trail
A Quick Example
Say your S-Corp nets $150,000 in profit:
| Split | Salary | Distribution | FICA Saved |
|---|---|---|---|
| 60/40 | $90,000 | $60,000 | ~$9,180 |
| 50/50 | $75,000 | $75,000 | ~$11,475 |
| 40/60 | $60,000 | $90,000 | ~$13,770 |
The aggressive 40/60 split saves the most — but only if $60k is defensible as a reasonable salary for your role.
Run Your Own Numbers
Our free Salary vs Distribution Calculator lets you model different splits instantly. Plug in your S-Corp profit, adjust the salary percentage, and see exactly how much you'd save — plus your effective tax rate at each level.
The right split saves real money. The wrong split invites the IRS. Know your numbers.