How Much Should You Pay Yourself from Your S Corp? Get It Wrong, and the IRS or Social Security Could Take a Hit

💼 How Much Should You Pay Yourself from Your S Corp? Get It Wrong, and the IRS or Social Security Could Take a Hit

Electing S Corp status for your LLC can save you thousands on self-employment taxes—but only if you handle one key step correctly:

👉 Your salary.

How much you pay yourself determines:

• How much FICA tax you owe now
• Whether you trigger IRS scrutiny
• What your future Social Security benefits may look like

It’s not just about saving money—it’s about balance, compliance, and long-term planning.

This blog walks you through:

• Why salary matters in an S Corp
• What the IRS expects
• The pros and cons of high vs. low salary
• Examples to guide your thinking
• When paying more FICA doesn’t actually help your Social Security check

🧾 Why Your Salary Matters in an S Corp

When you elect S Corp status, you split your earnings into two parts:

1. Salary (subject to FICA taxes)
2. Distributions (not subject to FICA)

FICA = Social Security + Medicare = 15.3%

So, if you earn $100,000 and:

• Pay yourself $40,000 salary → You pay FICA only on $40k = $6,120
• The remaining $60,000 is FICA-free

That’s why many people elect S Corp status—to reduce payroll taxes.

But… you can’t just pay yourself $1 and avoid taxes entirely.

⚖️ What Does the IRS Say?

The IRS requires that S Corp owners who provide services must pay themselves a “reasonable salary.”

If you don’t, the IRS can:

• Reclassify your distributions as wages
• Hit you with back taxes, penalties, and interest

Reasonable compensation depends on:

• Your role and responsibilities
• Industry and geographic standards
• Experience and education
• Time devoted to the business
• What similar roles are paid elsewhere

💳 Examples of S Corp Salary Strategy

Note: These are illustrative only. Always confirm with your CPA based on your business model and tax goals.

🧠 Low Salary: Pros and Cons

✅ Pros:

• Lower FICA tax bill (more in your pocket now)
• Higher net distributions
• Can reinvest more in your business

❌ Cons:

• May not satisfy IRS “reasonable” standard
• Lower contributions to future Social Security income
• May hurt ability to qualify for loans or mortgages

💡 High Salary: Pros and Cons

✅ Pros:

• Safer from IRS scrutiny
• Higher future Social Security retirement benefits
• Easier to qualify for mortgages (more reported income)

❌ Cons:

• Higher payroll taxes now
• Less immediate tax savings
• Less flexibility in compensation planning

📈 The Social Security Factor: FICA vs Future Income

FICA taxes (Social Security + Medicare) are what fund your future Social Security check.

Here’s the twist:

• If you’re not maxing out your Social Security wage base, paying yourself more salary could increase your future benefits.
• But once your income exceeds the annual wage cap ($168,600 in 2024), additional salary doesn’t increase your benefit.

In that case, you’re paying more FICA tax now… for no added retirement income.

That’s why many high earners reduce salary after they hit the cap and rely more on distributions.

📝 Pro Tip: Revisit Salary Annually

Business income fluctuates. Your “reasonable salary” should too.

• If your revenue increases, you may need to bump your salary
• If revenue drops, you can reduce salary (with CPA guidance)
• Annual reviews help balance compliance, tax savings, and Social Security growth

⚙️ Steps to Set Up Payroll Properly

1. Talk to Your CPA – Get help determining reasonable compensation
2. Choose a Payroll Platform – Gusto, ADP, Patriot, QuickBooks, etc.
3. Enroll in EFTPS – Pay payroll taxes electronically
4. Issue W-2s and file Form 941 quarterly
5. Track distributions separately from salary in your books

🧾 Bonus: Tie Your S Corp to Your Living Trust

Don’t forget the estate planning angle.

To keep your LLC or S Corp out of probate, make sure it is:

• Owned by your Living Trust, OR
• Your Living Trust is named as the post-death beneficiary via:
  • Operating agreement provisions, or
  • A transfer-on-death resolution

Mike Massey Law can help you integrate this into your formation or estate plan.

✅ Final Thoughts

Choosing your S Corp salary isn’t just about taxes—it’s about strategy, sustainability, and long-term planning. The sweet spot is where tax efficiency meets compliance and future retirement security.

📆 Book a Business & Estate Planning Strategy Call
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⚠️ Disclaimer:

This blog is for informational purposes only and does not constitute legal, tax, or accounting advice. Reading this blog does not create an attorney-client relationship. Please consult a licensed CPA or attorney in your jurisdiction before taking action.