Yes. You’re required to pay yourself a reasonable salary as an S-corp owner, which means at least what other businesses pay for similar services. If you don’t, you open yourself up to potential IRS scrutiny, penalties, and interest.
An S-corp (also called a Subchapter S corporation) is a small corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders’ personal tax returns.
S-corps distribute earnings to shareholders. Those distributions aren’t considered salary or wages, so they’re not subject to payroll taxes. But you can only make distributions to shareholders after you’ve paid shareholder-employees reasonable compensation for work they’ve done. That includes paying yourself.
Salary, including health insurance and other fringe benefits for officers or shareholders owning more than 2% of the corporation’s stock, should be included on the shareholder-employee’s Form W-2.
Once a reasonable salary has been paid to the shareholder-employee, all additional payments can be made as distribution. Distributions are subject to income tax but not payroll taxes!
The good news is, by paying yourself a salary, you can take advantage of all of the benefits that come along with it.
Advantages to the corporation are:
- You avoid IRS scrutiny and a potential audit.
- You can deduct salaries/wages and the associated payroll taxes as business expenses, which you can’t do with distributions.
- Business deductions for company contributions to retirement plans, group health insurance and Health Savings Accounts (HSA) are available.
- Paying wages shows company stability and increased credit worthiness.
Advantages to the employee-shareholder are:
- Withholding provides credits to Social Security and Medicare programs.
- Health Insurance premiums paid may provide an adjustment to income, which is more valuable than the itemized deduction on the personal tax return. More Info
- Income verification is more easily accomplished when salary and employment taxes are being paid.
- You're eligible for unemployment.