An S corporation shareholder who performs services for the business is generally considered an employee of the corporation. The business must pay the shareholder reasonable compensation through payroll before treating additional payments as nonwage distributions.

Reasonable compensation is not based on a universal percentage, and there is no automatic rule that salary and distributions should be divided sixty-forty or any other fixed ratio.

The appropriate salary depends on the facts and circumstances, including:

  • The owner’s duties and responsibilities
  • The amount of time devoted to the business
  • The owner’s training, experience, and professional qualifications
  • What similar businesses pay for comparable services
  • The business’s size, location, revenue, and profitability
  • Whether other employees perform portions of the owner’s work
  • The amount and timing of shareholder distributions

The salary should be supportable based on the work actually performed and should be reviewed as the business changes. The IRS states that wages paid to corporate officers should generally be consistent with their duties.