Wages for S Corporation Officers and Owners


S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. So, the corporation will have to pay employment taxes on an officer/owner’s salary for services to the corporation, just as it would for any other employee.

The issue, then, is how to determine a reasonable compensation for the officer. It can be difficult to arrive at a dollar amount for a salary, as opposed to dividends, which are a return on an investment and not based on services.

What’s a Reasonable Salary?

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Consider the Facts

Some factors considered by the courts in determining reasonable compensation include:

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

Carefully analyze and document these factors as they pertain to your particular corporation and officers. It is sometimes said that the IRS will always allow 20% (or 25%, or 10%) of income to be “investment return.” But this is not always the case. Meet with your accountant to determine a reasonable compensation for your corporate officer based on the particular circumstances of your business.

This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel or Kathryn S. Kumar.