Owner compensation

How should an S corporation owner get paid?

For an owner who works in an S corporation, salary, owner compensation taxes, distributions, and bookkeeping need to tell the same story. Treating every withdrawal as a distribution can create tax and compliance problems.

← Back to Business Owner Resource Center

Working owners generally need owner compensation

When an S corporation shareholder performs substantial services for the company, compensation for those services generally needs to be handled as wages through owner compensation before treating additional cash withdrawals as shareholder distributions. Owner compensation 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 owner compensation with required withholding and owner compensation tax deposits.
  • Record shareholder distributions separately from wages.
  • Reconcile owner draws, owner compensation, 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 owner compensation, 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.