Articles · S corporations
A shareholder who performs substantial services generally must take reasonable compensation as wages before taking non-wage distributions for that work. The number is not a percentage you pick — it is a conclusion you have to be able to defend.
Reviewed August 2026 · Mint Associates Ltd Co · Houston, Texas
You will hear 60/40, or 50/50, or "pay yourself a third." None of those appear in the Internal Revenue Code. They are rules of thumb that circulated until people started repeating them as law — and a rule of thumb is not a defense.
The test is what a comparable business would pay a comparable person for comparable work.
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A full-time owner who generates most of the revenue himself, running these numbers:
A $15,000 salary against $150,000 in distributions, for a full-time owner producing the revenue, is the fact pattern the IRS looks for. If the salary is not supported by the facts, distributions can be reclassified as wages — with employment tax, interest and penalties following.
Three cases people in this position should know about. They are the reason "I called it a distribution" is not an answer.
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{{ c.name }} {{ c.held }}Authority: IRC §§3121(d), 3306(i), 3401(c) and 1366(e), the Form 1120-S instructions, and the IRS's own S corporation compensation guidance.
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{{ m.t }} {{ m.d }}The better approach
Document duties, hours and market compensation annually — a one-page memo in the corporate records, written the year the salary is set, not reconstructed later. What you did, how many hours, what comparable roles pay, and how the figure follows. That document is the difference between a position and a guess.
It is not a number for your business. Reasonable compensation is fact-specific, and anyone who quotes you a percentage without asking what you do has told you something about themselves rather than about your return.
It is also not the whole picture: distributions interact with shareholder basis, and a distribution that exceeds basis can produce gain even when the salary question is settled.
How we handle it
Every S corporation client gets a compensation memo for the year and a basis schedule that ties to it. Not because an examination is coming, but because the record has to exist before anyone asks for it.
S corporation returnsEducational information, not individualized tax advice. Reasonable compensation depends on your specific facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
Tell us what you do in the business and what you have been paying yourself. Thirty minutes, and you will know whether the split holds.