S-Corp Reasonable Salary Calculator

Worked example

How the salary-percentage heuristic works (and why it is not a rule)

The calculator uses a simple idea: take part of your S-corp profit as W-2 salary, which carries FICA tax, and take the rest as a shareholder distribution, which does not. A common starting point is somewhere between 30% and 50% of net business income as salary, with 40% as a middle-of-the-road default. Multiply your net income by the percentage and you get a suggested wage; the remainder becomes the distribution.

It is important to be blunt about what this percentage is. It is a sanity anchor, not IRS guidance. The so-called 60/40 rule and its cousins are industry shorthand that hardened into myth. The IRS has never published a safe-harbor fraction, and no percentage makes a salary automatically reasonable. The statute and case law ask a different question entirely: what would an unrelated employer pay someone else to do the exact job you do, in your industry, in your region, for the hours you put in?

That is why the percentage you pick should be driven by how service-heavy your business is. A hands-on consultant, surgeon, or agency owner who personally generates nearly all the revenue sits at the high end, because most of the profit is really payment for their labor. A business with employees, significant equipment, inventory, or invested capital can defend a lower percentage, because a genuine slice of the profit is a return on capital and on other people's work rather than on the owner's services.

Use the dollar output, not the percentage, as your reality check. If 40% of your net income produces a $28,000 salary but the going rate for your role is $75,000, the heuristic has failed you and the split is indefensible. Conversely, if the percentage spits out a number close to independent market data for your position, you have a defensible figure and a paper trail to match. The percentage gets you into the right neighborhood fast; comparables and the IRS factors tell you whether you can actually live there.

The nine IRS reasonable-compensation factors

When the IRS or a court tests an S-corp salary, they do not reach for a formula. They weigh a cluster of factors drawn from published guidance and case law. Fact Sheet FS-2008-25 and later rulings point to roughly nine considerations. Knowing them lets you build a defense before anyone asks.

• Training and experience — your education, credentials, and years in the field. A specialist commands more than a generalist.
• Duties and responsibilities — what you actually do day to day, including management, sales, and technical work.
• Time and effort devoted — full-time hands-on involvement supports a higher salary than a few hours a week.
• Dividend (distribution) history — a pattern of large distributions alongside a token salary is the single loudest red flag.
• Payments to non-shareholder employees — if a rank-and-file employee doing similar work earns more than you claim as wages, your number looks manipulated.
• Timing and manner of bonuses — bonuses tied to services support wages; amounts that track share ownership look like disguised distributions.
• What comparable businesses pay for similar services — external market data is the anchor the IRS trusts most.
• Compensation agreements — a written, arm's-length arrangement carries weight.
• Use of a formula to set compensation — a consistent, defensible method beats a number picked to minimize tax.

Notice what unites the factors that carry weight: they all point outward, to what the labor is worth in the open market, not to what leaves the most cash after tax. The two factors that most often sink taxpayers are distribution history and comparables. In the leading cases, owners who zeroed out or minimized salary while pulling six-figure distributions lost, and the courts recharacterized distributions as wages plus penalties. Document your role, pull salary data for your title and metro area (from wage surveys, job boards, or a reasonable-compensation report), and keep the evidence with your tax file. The percentage in this tool is a starting draft; these factors are what actually decide the case.

How much FICA you actually save

The saving comes from one fact: distributions are not subject to FICA, wages are. For 2026, wages carry a combined 15.3% up to the Social Security wage base of $184,500 (12.4% Social Security plus 2.9% Medicare), counting both the employer and employee halves that a shareholder-employee ultimately bears. Above the wage base, Social Security drops off and only the 2.9% Medicare continues, with no cap.

So the size of your saving depends heavily on where your salary sits relative to that wage base. If your total profit is below $184,500, every dollar shifted from salary to distribution saves the full 15.3%. That is the simple case behind the worked example: $90,000 of distribution times 15.3% equals $13,770 saved. But once your salary alone reaches the $184,500 wage base, additional dollars of salary only cost the 2.9% Medicare, so the marginal saving from shifting them to distributions falls to 2.9% (plus 0.9% Additional Medicare if you are over the high-earner threshold). High earners still save, but far less per dollar than the headline 15.3% suggests.

Two more subtleties matter. First, the 0.9% Additional Medicare Tax applies to wages above $200,000 (single or head of household), $250,000 (married filing jointly), or $125,000 (married filing separately). It is an employee-only tax with no employer match, and employers must start withholding it once your wages pass $200,000 regardless of filing status. Second, remember what you give up. A lower salary can shrink your Social Security benefit base, your ability to contribute to a Solo 401(k) or SEP (which are keyed to wages), and, depending on the year's rules, the qualified business income deduction math. The FICA saving is real, but it is not free money.

The honest way to read this tool's output is as an upper-bound estimate of tax avoided, valid only if the salary it suggests is genuinely defensible. Save aggressively on paper and you may hand back the entire saving, and more, in reclassified wages, penalties of up to 20%, and interest.

Reality-checking your split before you file

Before you run payroll on the number this calculator produces, put it through a short defensibility checklist. The goal is not to find the lowest salary that survives; it is to find a salary you can support with a straight face and a folder of evidence.

Anchor to real comparables. Find at least one independent data point for your exact role and market: a wage survey, a staffing-agency rate, a job posting for the same title, or a formal reasonable-compensation report. Write down the source and date. If your suggested salary is within a sensible range of that figure, you are on solid ground. If it is far below, raise it.

Match salary to how much of the profit is really your labor. Separate the return on your work from the return on capital and on other employees. A solo service provider should expect most profit to be wages. A business with staff and assets can justify a bigger distribution share. The split should mirror the economics, not just the tax bill.

Watch the distribution-to-salary ratio. Zero salary with large distributions is the classic audit trigger and a loser in court. Even a modest but genuine salary paired with distributions is defended far more easily than an aggressive one. If distributions dwarf wages, expect scrutiny.

Keep contemporaneous records. A written compensation rationale, board or owner minutes, and your comparables should be dated and filed with the return, not reconstructed years later under examination. Contemporaneous evidence is worth far more than a persuasive story told after an auditor calls.

Do not forget the whole-picture costs. Confirm your salary still supports the retirement contributions you want, does not needlessly cut your future Social Security, and fits your overall tax plan. This tool estimates one lever, FICA, and cannot see the rest of your return. When the numbers are large or the facts are borderline, have a CPA or Enrolled Agent bless the figure. The cost of that review is trivial next to a reclassification assessment.

Frequently asked questions