As discussed often, the S Corporation requires the officer to have a reasonable salary (w2). The reasonable requires your salary to be:

  • In line with the net profit or losses of the company – A start up company having losses might not have officer salary (neither owner distributions)
  • You should perform a benchmark for your industry and your area (location is extremely important as salaries might vary significantly from a major city to a remote suburban area)
  • Consider if you are working on that business full time or part time (there might be hourly rates available for similar positions)
  • Keep documentation on how you arrived to the officer salary in case of an examination
  • If there are distributions (or repayments of loans) and no officer salary, then, these distributions could be considered salary and subject to employment taxes. This is a big red flag.
  • Keep in mind that form 1120S has a special line item for officer salary “Compensation of officers” line 7 and if there is a net profit for the business with no value on that line, you might increase your odds for an examination. This is another red flag.

Additionally, you should consider the 199A benefits (20% QBD that considers the officer salary – w2) still in place for 2025.

Link IRS – Wage Compensation for S Corporation Officers