Is your S-corp salary defensible — and what does closing the gap cost?
A single-shareholder S-corp that also performs services for the business must pay a "reasonable" W-2 salary before taking any profit out as a distribution. There is no IRS safe-harbor percentage — the test is a comparable-wage comparison: what an unrelated employer would pay someone else to do your job, for your hours. Enter your own numbers below and see where you stand, and what raising salary would cost in FICA tax.
After using this, you can now see whether your planned S-corp salary is defensible against the actual test the IRS and courts apply, and exactly how much closing the gap costs in FICA tax — which used to mean paying $200-900 for a third-party reasonable-compensation report or guessing at a mythical "60/40 rule" that isn't an IRS rule at all. See why the IRS cares, how this compares to a paid reasonable-compensation report, or how this compares to just picking a round number.
Lowering your salary also raises your Section 199A QBI deduction (wages reduce QBI) — see the QBI deduction calculator for that side of the same pass-through income, and weigh it against the audit-risk flag below before deciding. Own your home? See what renting it to your business for up to 14 days saves with the Augusta rule calculator. If you also take losses or distributions from the S corporation, check them against your stock and debt basis with the S-corp basis tracker.
Your numbers
"Compensation pool" is your S-corp's net ordinary income for the year, before your own wages are subtracted. The comparable-wage figure is one you supply — from BLS OEWS wage data, a trade salary survey, or your own judgment of what a competing employer would pay for this exact role and these exact hours.
Result
Enter your numbers above and choose Assess.
Nine-factor documentation checklist
Courts and the IRS weigh a multi-factor test rather than one number (see the explainer page for the case law). This calculator does not score or sum these into a figure — that would overstate what arithmetic can settle. Print this page or copy your answers into your own file as evidence of how the number above was reached.
Every figure you enter stays on this device. Nothing is uploaded. Usage counts contain only feature names and are never sent anywhere.
Common questions
What is "reasonable compensation" for an S-corp owner?
A shareholder of an S-corp who also performs services for the business must be paid a reasonable salary as W-2 wages before any profit is distributed to them. The IRS and the courts test this by comparing your pay to what an unrelated employer would pay someone else to do the same job, for the same hours — not by any fixed percentage of profit.
Is there an IRS safe-harbor percentage, like paying yourself 60% of profit as salary?
No. The IRS has never published a safe-harbor percentage, and the "60/40" or "1/3" rules of thumb circulating online are informal guidance from advisors, not an IRS rule. This calculator does not use a percentage rule; it compares your planned salary to a comparable-wage figure you supply for your own role and hours, which is the test actually applied in litigated cases.
What happens if I pay myself too little salary and take the rest as distributions?
The IRS can recharacterize part of your distributions as wages, assess back payroll tax (both the employer and employee shares of FICA), plus penalties and interest. Watson v. Commissioner (8th Cir. 2012) is the leading case: a $24,000 salary against roughly $200,000–274,000 of annual profit was recharacterized to $91,044.
Can my S-corp pay me more salary than it actually earned this year?
A corporation is not generally expected to pay out more in salary than it earned in a lean year — the reasonable-compensation rule targets disguised distributions from profit that exists, not a shortfall when there isn't any. If your comparable-wage figure exceeds what the business made, that is a signal to talk to your own preparer about the options, not a hard floor this calculator enforces.
Why does raising my salary cost more in FICA tax?
W-2 salary is subject to combined Social Security and Medicare tax (FICA) — 15.3% combined below the annual Social Security wage base, 2.9% above it, plus an extra 0.9% employee-only Medicare tax above a fixed income threshold. Distributions from an S-corp are not subject to FICA. That tax difference is exactly why the IRS scrutinizes a low salary paired with a large distribution — it is the incentive to understate salary, not a loophole this calculator is built to help you exploit.