Even a $5,000 delta equates to $765. As such, your S Corp officer compensation needs to be reasonable, sure, but it also needs to be as low as reasonableness and not-so-common sense will allow….Reasonable S Corp Salary Theory.

Where are the details of compensation for an S Corp officer reported?

As of December 2011, any officer who provides services to an S corporation must take a salary. That salary must be reported on the officer’s individual tax return and must be shown as an expense on Form 1120S.

How are corporate officers compensated for working at an S corporation?

When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

What is considered as reasonable compensation?

Section 162 defines reasonable compensation as the amount that would ordinarily be paid for like services by like organizations in like circumstances. It considers both the reasonableness of the total amount paid and the services rendered.

Should I pay myself a salary from my S corp?

If you have an S corp, then probably the most relevant IRS regulation for you is that if you’re a shareholder-employee, you must pay yourself a “reasonable” salary. On the flip side, you can still work for free or for less than reasonable compensation if you don’t want to pay yourself a distribution.

Can you leave money in an S corp?

If the board of directors — which may be the owners of a small S corp — decides to keep the cash in the business, the money would become an asset of the company. Since the company profits are taxed at the ownership level, there are no tax problems with keeping the money in the company’s bank account.

How does an S Corp pay employees?

Some S Corp owners only pay themselves a salary once annually, at the end of the year. But it’s wise to get paid at least quarterly since your business might have to make quarterly payroll and income tax deposits, as well as file quarterly employment tax returns.

Do you have to take a salary in an S Corp?

If you work for the corporation, you generally must take a salary. An officer who performs more than minor services for a corporation, and who receives remuneration in any form, is considered an employee and is subject to employment taxes.

How do I pay myself as an S Corp?

Here’s a simple strategy that you can try, and it’s called the 60/40 rule:

1. Pay 60% of your business income to yourself in the form of employee salary.
2. Pay yourself 40% of your business income in the form of distributions.