If you own an S corporation and work in the business, the IRS requires you to pay yourself a reasonable salary through payroll before you take distributions. A reasonable salary is roughly what the business would have to pay someone else to do the work you do. This free calculator estimates it from the roles you perform and the market wage for each, then compares payroll taxes under three ways of paying yourself. No login or email needed.
Your estimate
Estimates use 2026 rates: Social Security 6.2% each for employer and employee on wages up to $184,500, Medicare 1.45% each, and the 0.9% Additional Medicare Tax. They leave out federal and state unemployment tax, income tax and the cost of running payroll.
What "reasonable salary" means and why the IRS requires it
S corporation profits pass through to the owners' personal tax returns. Salary paid to an owner who works in the business is subject to Social Security and Medicare taxes (15.3% combined between employer and employee, with the Social Security part stopping at the annual wage base). Distributions of profit are not. That gap creates an obvious temptation to pay yourself a tiny salary and take the rest as distributions.
The IRS closes the gap by requiring shareholders who work in the business to receive reasonable compensation for their services before taking distributions. If it decides your salary was too low, it can reclassify distributions as wages and assess the back payroll taxes, plus interest and penalties. Courts have repeatedly sided with the IRS. In David E. Watson, P.C. v. United States (8th Cir. 2012), a CPA paid himself a $24,000 salary while taking far larger distributions, and the court set his reasonable salary at about $91,000.
How the calculator estimates your salary
The calculator uses a common method sometimes called the "many hats" approach, which is similar to the cost approach described in the IRS's reasonable compensation job aid for its valuation professionals. You probably do several jobs in your business, so your salary should reflect what it would cost to hire people to do each of them.
- List your roles, for example consultant, office manager and bookkeeper.
- Estimate your time in each role. The shares must add up to 100%.
- Look up a full-time market wage for each role. The Bureau of Labor Statistics Occupational Employment and Wage Statistics (OEWS) data lists annual wages by occupation and metro area. The median is a reasonable starting point. Use a higher percentile if you have unusual experience or credentials.
- The calculator weights each wage by your time and adds them up. If you work fewer than 40 hours a week, it scales the result down.
It then compares three ways to take the same profit out of the business: a reasonable salary plus distributions, all profit as salary, and no S corp election at all (self-employment tax on the whole profit). The comparison covers payroll and self-employment taxes only, not income tax.
IRS factors for reasonable compensation
The IRS has no formula. It and the courts look at the facts, including:
- Your training and experience
- Your duties and responsibilities
- The time and effort you devote to the business
- The business's dividend (distribution) history
- What the business pays employees who are not owners
- The timing and manner of bonuses paid to key people
- What comparable businesses pay for similar services
- Any compensation agreements
- Whether a formula is used to set compensation
Write down how you set your salary each year. A short memo listing your roles, time estimates and the wage data you used, such as the inputs in this calculator, is a good start.
The 60/40 and 70/30 "rules" are rules of thumb, not IRS rules
You may have heard that S corp owners should take 60% of profit as salary and 40% as distributions, or 70/30. No law, regulation or IRS guidance says this. These ratios are shortcuts, and they can be wrong in either direction:
- If your business earns $400,000, a 60% salary of $240,000 may be well above the market rate for the work you do, so you would pay more payroll tax than required.
- If your business earns $60,000 from your full-time work, a 60% salary of $36,000 may be too low for your field, which is the situation the IRS looks for.
A salary based on the work you actually do and what the market pays for it is easier to defend than a percentage.
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Frequently asked questions
What is a reasonable salary for an S corp owner?
The amount the business would have to pay someone else to do the work you do, based on your duties, time, experience and local market wages. There is no fixed percentage. Estimate it with the calculator above, then confirm it with a CPA.
What is the S corp 60/40 rule?
A rule of thumb that suggests paying 60% of profit as salary and 40% as distributions. It is not an IRS rule. The right salary depends on the services you perform, not on a share of profit.
What percentage of profit should my S corp salary be?
There is no required percentage. A reasonable salary can be most of the profit for a one-person service business and a small share for a business whose profit comes mostly from employees, equipment or capital.
Can I pay myself no salary from my S corp?
If you work in the business and take money out, the IRS expects a reasonable salary first. In a year with little or no profit, a low salary and no distributions may be appropriate. Ask your CPA how to handle your situation.
What happens if my S corp salary is too low?
The IRS can reclassify some or all of your distributions as wages and assess the employer and employee payroll taxes that should have been paid, plus interest and penalties.
Does this calculator include income tax?
No. It compares payroll and self-employment taxes only. Your salary level also affects your income tax, including the qualified business income deduction and how much you can put into a retirement plan, which is another reason to involve a CPA.
Which tax rates does the calculator use?
It uses the 2026 Social Security wage base of $184,500, Social Security tax of 6.2% each for employer and employee, Medicare tax of 1.45% each, and the 0.9% Additional Medicare Tax on wages above $200,000 (single), $250,000 (married filing jointly) or $125,000 (married filing separately). These figures are updated each year from IRS and Social Security Administration announcements.