📅 Day 8: Should You Pay Yourself a Salary? (For LLC/S-Corp Owners)

 💼 Should You Pay Yourself a Salary? (For LLC/S-Corp Owners)

Navigating how to compensate yourself as a business owner isn’t just about getting paid—it’s about staying compliant, managing taxes, and protecting your financial future. If you’re an LLC taxed as an S-Corporation, paying yourself a reasonable salary isn’t optional—it’s required.

Let’s unpack why, when, and how to pay yourself a salary the right way.

🧐 What Does "Reasonable Salary" Mean?

The IRS expects S-Corp owners who perform substantial work for the business to pay themselves a “reasonable” wage. That means:

• Comparable Pay: Your compensation should be similar to what someone else would earn doing your job.
• Fair for Workload: Consider the time, effort, and responsibilities you take on.
• Backed by Evidence: You may need to support your salary with industry data or job listings.

💡 Pro tip: Documenting your rationale—like hours worked, roles performed, and industry benchmarks—can save you trouble during an audit.

📊 Why It Matters for Taxes

S-Corp profits can be distributed as dividends, which are not subject to self-employment tax. But salary payments are subject to payroll taxes, which include:

• Social Security & Medicare (FICA)
• Federal and state unemployment (FUTA/SUTA)

By balancing salary and distributions wisely, you can minimize total tax liability—but skip the salary altogether, and you risk penalties and back taxes.

📝 How to Pay Yourself

Here’s what’s typically involved:

Step	What to Do
💵 Set Your Salary	Use industry data and job duties to determine a fair amount
🏦 Run Payroll	Pay yourself through a formal payroll system with tax withholdings
📂 File Payroll Taxes	Submit quarterly returns and remit employer tax obligations
📥 Take Distributions	Profit left over after salary can be withdrawn as dividends

You can use services like Gusto or QuickBooks Payroll to handle the technical side—or work with a CPA to ensure you’re covered.

⚠️ What If You Don’t Take a Salary?

Skipping a salary (or paying too little) as an S-Corp owner isn’t just frowned upon—it’s an audit red flag. The IRS may:

• Reclassify distributions as unpaid wages
• Assess back payroll taxes and penalties
• Trigger an audit of multiple tax years

📌 Final Thoughts

Paying yourself a salary as an LLC/S-Corp owner isn’t just about compliance—it’s about clarity. You’re treating yourself as both employer and employee, which sets a strong foundation for growth, investor confidence, and long-term stability