York, Pennsylvania – November 01, 2026 -- S corporation owners who pay themselves too little salary risk having the IRS reclassify shareholder distributions as wages, which can bring back payroll taxes, interest and penalties, according to accounting expert David Riggs of York, Pennsylvania.

Riggs' insights appear in a HelloNation article on how salary and distributions affect payroll taxes.

Wages carry payroll taxes that distributions generally avoid

Working S corporation owners are both shareholders and employees. Their pay can include wages through payroll and shareholder distributions. Salary is subject to Social Security and Medicare taxes, while distributions generally are not. That gap creates potential tax savings, but owners cannot replace reasonable wages with distributions.

No fixed dollar amount or percentage defines reasonable salary

The article states that reasonable salary depends on the work performed and what comparable businesses would pay for similar services. Relevant factors include training, experience, responsibilities and time devoted to the business. Business size, complexity, revenue and profits can also influence the figure.

Owners who handle management, sales, technical work and bookkeeping can compare market wages or assign compensation to each role. A 60 percent salary and 40 percent distribution split is not an official IRS guideline, the article cautions.

Records, annual reviews and formal payroll support the wage classification

The article recommends keeping salary research, job descriptions and records of hours worked. Owners should review compensation annually to reflect changing responsibilities and business growth. Salary should run through formal payroll with required withholding, filings and a year-end W-2.

New businesses may justify lower pay, but large distributions draw scrutiny

Limited profit or cash may support lower compensation at a new business, according to Riggs. The article stresses scrutiny when significant distributions accompany little salary.