Working owners generally need payroll
When an S corporation shareholder performs substantial services for the company, compensation for those services generally needs to be handled as wages through payroll before treating additional cash withdrawals as shareholder distributions. Payroll should be reported consistently through the business books and employment tax filings.
What affects reasonable compensation?
There is no single salary that fits every owner. Factors can include the work performed, hours and responsibilities, experience, comparable market pay, profitability, and the amount of non-owner labor or capital contributing to the business.
Keep wages and distributions clearly separated
- Run salary through payroll with required withholding and payroll tax deposits.
- Record shareholder distributions separately from wages.
- Reconcile owner draws, payroll, shareholder loans, and equity accounts before year end.
- Keep documentation supporting how the compensation level was determined.
If the owner has taken money all year without payroll, address it before filing the business return instead of waiting until the return is being prepared.
This page provides general educational information. Compensation decisions should be reviewed using the corporation's actual facts and records.