How to Pay Yourself in an S Corporation
Pay yourself a salary as an employee if you perform employee-type functions, like serving as an accountant or lawyer. Make your pay equivalent to executives or employees in similar businesses. Withhold income tax, Social Security and unemployment taxes the same way they are deducted from a non-shareholder employee or a worker in another company. Deduct them from income as operating expenses.
Take your S corporation income as shareholder distributions to avoid having to withhold taxes. Make this distribution appropriate to your role in the S corporation. Refer to IRS guidelines if you are sole owner of an S corporation who also performs services like accounting or legal filings. Courts have held that a company cannot avoid federal payroll taxes with income distributions, even for sole owners.
Combine distributions and wages if you perform some essential employee functions for the corporation; pay should “generally be commensurate with your duties,” the IRS says. Split net income of $150,000, for instance, with $50,000 in wages and $100,000 in distributions if your duties qualify you as an employee.