Why S-Corp Owner Pay Matters
If you run an S-Corp, the IRS requires you to pay yourself a "reasonable salary" via W-2 before taking shareholder distributions. Get this wrong and you either overpay FICA taxes (costing you thousands per year) or underpay your salary and risk an IRS audit.
The key insight: your W-2 salary is subject to FICA (Social Security + Medicare) at 15.3% combined (employer + employee), but shareholder distributions are not. The goal is to set your salary high enough to satisfy the IRS, and then take the rest as distributions to minimize self-employment tax.
What Counts as Reasonable Compensation
The IRS doesn't give a specific number — they look at comparable salaries for your role, industry, and geography. Factors that matter include your experience, hours worked, the company's revenue, and what similar businesses pay for the same work.
A common starting point for small S-Corp owners: 35-45% of net business income as W-2 salary. For a construction GC doing $500K in revenue with $125K in net profit, a $50-55K salary is often defensible. But always consult a CPA for your specific situation.
The Math: Salary vs. Distributions
Let's say your S-Corp's owner pay pool (net profit allocated to you) is $100,000.
Option A — All salary: You pay 15.3% FICA on the full $100,000 = $15,300 in employment taxes.
Option B — $40,000 salary + $60,000 distributions: You pay 15.3% FICA only on $40,000 = $6,120. The remaining $60,000 is still subject to income tax, but you save $9,180 in FICA.
That $9,180 per year compounds. Over 10 years at 7% returns, that's over $130,000 in wealth you kept instead of sending to the IRS.
Employer FICA and the Hidden Cost
Remember: FICA is split between employer (7.65%) and employee (7.65%). As an S-Corp owner, your company pays the employer half and you pay the employee half. Both come out of your pocket — the employer portion is a business expense that reduces your W-2 gross.
This is why Trikled's payroll stage breaks out both employer FICA and employee FICA separately. You need to see both to understand the true cost of your salary decision.
Distribution Tax Reserve
Distributions aren't tax-free — they're just not subject to FICA. You still owe federal and state income tax on them. Smart S-Corp owners set aside 20-25% of gross distributions as a tax reserve so they're never caught off guard at tax time.
In Trikled's Stage 2, the "Distribution Tax Reserve" bucket handles this automatically. Adjust the percentage based on your marginal tax bracket.