The first question is what the shareholder actually does. A founder who sells, delivers the service, supervises employees and manages finances performs several jobs. Document the time devoted to each role, relevant experience, location and comparable pay. Gross revenue alone does not tell you the value of those services. A business with employees and substantial equipment may have a different earnings profile from a consultant whose revenue comes almost entirely from personal labor.
Build the salary decision from services, not a percentage
Payments to an owner who performs substantial services require reasonable compensation treatment. There is no universal salary-to-distribution ratio that replaces an analysis. Review salary, bonuses, benefits and payroll filings together. A proposed distribution should trigger a check that the compensation conclusion still fits the current year. Rapid revenue growth, a new service line or a change in owner hours can make last year's documentation stale.
Worked planning example
A consulting corporation has $240,000 available before owner compensation and related employer payroll costs. Its compensation analysis supports $120,000 of salary for the owner's duties. The amount potentially available for distributions is not simply $120,000: employer payroll taxes, benefits, overhead, debt service and reserves still consume cash. This illustration establishes no recommended salary and promises no savings. It shows why a payroll model and cash model must accompany the salary study.
Records to bring to the review
- List owner duties and hours by role.
- Retain compensation comparisons and the reason selected.
- Reconcile wages to payroll returns and the W-2.
- Review cash reserves before authorizing distributions.
Can I use a fixed 60/40 split?
A fixed split does not establish reasonable compensation. Support the pay with the services performed and relevant compensation evidence.
Read this alongside the AE book and published cases
This companion guide provides additional education for readers of S Corporation Tax Savings. It is not a quotation or chapter excerpt. The worked example is hypothetical and should not be confused with a reported AE client outcome.
Use the AE Tax Advisors s corporation case-study collection to compare the assumptions and supporting records behind published reports. Reported results are publisher statements, not independently audited results or a prediction for another taxpayer. The case-study methodology explains those limits.
Primary source and next reading
IRS guidance for this topic. IRS publications can cover earlier return years; check applicable current-year instructions, law and state treatment before implementation.
Read the complete companion reading sequence or browse the existing learning library. For the broader loss framework, read how the 2026 excess business loss limitation works.
General federal tax education. Actual outcomes require complete facts, applicable law and a taxpayer-specific review. A deduction amount is not the same as tax saved or cash available.
Discuss your planning facts with AE Tax Advisors
Bring the records identified in this guide to a discovery conversation with AE Tax Advisors. Start with the decision you need to make, the year affected and the assumptions that need verification.