If you’re contemplating S Corporation salary vs distribution and asking yourself, “Did I pay myself properly this year?”, you’re not alone.

Many business owners struggle with this, especially S Corp owners who need to balance tax efficiency with IRS regulations.

In this guide, we’ll dive into how to pay yourself properly, the concept of reasonable compensation, and what steps to take if you haven’t paid yourself correctly.

Plus, we’ll discuss how to ensure this problem doesn’t happen next year.

What Is Reasonable Compensation, and Who Needs It?

The IRS is crystal clear on this: if you’re an S Corp or C Corp owner actively working in your business, you must pay yourself a reasonable salary via payroll.

This salary should run through a proper payroll system, with federal income taxes withheld just like any other employee.

However, if you’re a sole proprietor or an LLC (not taxed as an S Corp), you’re off the hook.

Instead, you take owner’s draws or distributions, which is a much simpler process.

Why Reasonable Compensation Matters

For S Corp owners, paying yourself properly as an employee comes with both benefits and responsibilities:

• The Benefit: Distributions (any profits you take out beyond your reasonable salary) aren’t subject to payroll taxes like Social Security, FICA and Medicare taxes. This can save you from having to pay 15.3% self employment taxes —a significant advantage for many business owners.
• The Catch: You’re required to pay yourself a reasonable salary for the work you do. This salary must have payroll taxes deducted, and the IRS closely monitors this to ensure compliance.

Failing to pay a reasonable salary can lead to fines, interest, or even an audit.

And while saving on Social Security and Medicare taxes is great, setting your salary too low (or not paying one at all) can put you in hot water with the IRS.

How to Determine Your Reasonable Salary

Avoid guessing or relying on arbitrary rules like “50/50” or “60/40” splits between salary and distributions.

These aren’t IRS-backed guidelines and could lead to costly mistakes.

Instead, invest in a Reasonable Compensation Report.

These reports use industry data to determine a defensible salary that meets IRS standards while maximizing your tax savings.

You can get your personalized report at JamieTrull.com/RCReports.

It takes less than 30 minutes to complete, and I personally review every report to ensure accuracy.

What to Do If You Didn’t Pay Yourself Properly This Year

Timing matters when correcting your payroll. Here’s what to do based on where you are in the fiscal year:

Before Year-End

If it’s still the current fiscal year (e.g., before December 31 for most businesses), you have more flexibility:

1. Run a Catch-Up Payroll: Calculate what your reasonable salary should have been and run a one-time payroll to make up the difference.
2. Reclassify Distributions: If you’ve already taken distributions, you can reclassify some of that as salary. This involves updating your financial records and paying the appropriate payroll taxes.

After Year-End

If the fiscal year has already ended, your options are more limited:

1. Talk to Your Payroll Provider: Some payroll systems allow you to run back payroll, even after the year has ended.
2. Reclassify Retroactively: Like the year-end process, you may need to reclassify distributions as salary and file amended payroll tax reports.

Either way, it’s essential to act quickly to minimize penalties and interest on your federal taxes.

Setting Up Payroll for Future Compliance

The easiest way to avoid this issue in the future is to set yourself up on a consistent payroll system.

This ensures you’re paying yourself the correct salary throughout the year and staying compliant with IRS regulations.

I recommend exploring payroll solutions tailored to S Corp owners, especially if you’re running payroll only for yourself.

Check out JamieTrull.com/Payroll for my top recommendations.

Common Mistakes Business Owners Make

Here are some pitfalls to avoid when paying yourself as an S Corp owner:

• Skipping Payroll Altogether: Not paying yourself a salary at all is a red flag for the IRS.
• Using Arbitrary Salary Rules: Relying on generic rules like “50/50 splits” can lead to overpayment or underpayment of taxes.
• Procrastinating Fixes: Waiting until an audit to address salary issues can result in hefty fines and penalties.

The Cost of Getting It Wrong

If you fail to pay yourself properly, the IRS can assess back taxes, fines, and interest on unpaid payroll taxes.

While ignoring the issue might seem tempting, it’s much less expensive—and less stressful—to correct it proactively.

How to Get Started

Here’s your action plan to ensure compliance and maximize tax savings:

1. Get a Reasonable Compensation Report: Visit JamieTrull.com/RCReports to determine your proper salary.
2. Set Up Payroll: Use a payroll solution designed for S Corps, available at JamieTrull.com/Payroll.
3. Correct Past Mistakes: Work with your payroll provider or accountant to reclassify distributions or run catch-up payroll if needed.

A Quick Word of Encouragement

If this feels overwhelming, remember: you’re not alone.

Many S Corp owners struggle with understanding and implementing reasonable compensation. The key is to take action now and set yourself up for success going forward.

To learn more about managing your finances and staying compliant, be sure to subscribe to my YouTube channel and check out my other resources for S Corp owners.

This transcript is from the video and has been formatted for readability.

Did you pay yourself properly this year? If you’re not sure, you’re not alone. Many business owners struggle with this, but don’t worry—I’ve got you covered.

In this guide, I’ll walk you through how to fix this issue to minimize damage and, more importantly, how to ensure it doesn’t happen again next year so you can pay yourself properly from the beginning.

First, let’s address who needs to be paying themselves a salary. The IRS makes it clear: if you’re an S Corp or C Corp owner actively working in the business, you’re required to pay yourself a reasonable salary through payroll, with taxes withheld like any other employee.

If you’re a sole proprietor or an LLC that hasn’t elected to be taxed as an S Corp, you don’t need to worry about this—you should only take owner’s draws, which is much simpler.

So, why is paying yourself a reasonable salary so important? For S Corp owners, it’s a major tax benefit. Distributions beyond your salary aren’t subject to payroll taxes (saving you the 15.3% self-employment tax), but this benefit comes with a big responsibility.

The IRS keeps a close eye on reasonable salary compliance, and failing to follow the rules can result in fines, interest, or worse during an audit.

If you’re not sure what constitutes a reasonable salary, steer clear of arbitrary rules of thumb like a 50/50 split between salary and distributions.

Instead, get a Reasonable Compensation Report backed by data. I offer these through RC Reports, the premier company for determining reasonable salaries, so you don’t overpay in taxes or put yourself at risk with the IRS.

Now, if you’re realizing you didn’t pay yourself properly this year, there are steps to fix it depending on the timing.

Before year-end, you can run a catch-up payroll to align your salary with IRS expectations. If you’ve already taken distributions, you may need to reclassify some of them as salary.

While this may involve paying payroll taxes retroactively, it’s far less risky than hoping the IRS doesn’t notice.

If it’s already the new year, your options are more limited, but you can still work with your payroll provider to correct last year’s reports.

Whatever you do, don’t ignore the problem—fixing it sooner reduces penalties and protects your business from costly consequences.

To prevent this issue moving forward, make sure you’re set up on payroll and paying yourself consistently throughout the year.

I’ve compiled a list of the best payroll solutions for S Corp owners, especially those looking for cost-effective, easy-to-use options. Check them out at jamietrull.com/payroll.

And remember—you’re not alone in this!

Many business owners make mistakes with reasonable salary requirements, but you can fix it and move forward confidently.

Be sure to subscribe to my channel for more tips on staying compliant, reducing taxes, and setting up systems that work for you and your business.

If you’re ready for a deeper dive into streamlining your financial systems, don’t miss my video on the three systems every business owner needs—a perfect way to start fresh in the new year.

Let’s get your finances on track!