How To Pay Yourself As An S-Corp Owner

If you own an S-Corp, you basically wear two important hats in your organization.

Hat #1: The Employee
You do the work. You pay yourself a salary. It runs through payroll like any normal job.

Hat #2: The Owner
You own the business. You take distributions from actual profit (after salary). That’s your reward for building something valuable.

In short, you get paid in two different ways, and how you split that money decides how much tax you’ll pay.

Feeling a little confused?

Well, don’t be. Keep reading to decode how to pay yourself as an S-Corp owner.

But first, a quick recap on the basics so we’re on the same page.

What’s an S Corp?

An S Corporation (short for Subchapter S Corporation) is a business structure that gives small business owners the best of both worlds,  the legal protection of a corporation and the tax perks of a small business.

In a regular corporation (a “C-Corp”), profits are taxed twice:

1. The company pays corporate income tax.
2. You pay personal income tax when you take dividends.

But with an S-Corp, your company’s profits are taxed only once (on your personal tax return), not at both the corporate and personal level.

That’s why an S-Corp is also called a pass-through entity.

💡 Did you know? The U.S. created the S-Corporation during the late 1950s when policymakers were worried that small businesses were being crushed by big corporations. So, they introduced the S-Corp to encourage entrepreneurship and keep capital circulating domestically, a move some historians tie to anti-communist economic strategy.

Why Do People Love S-Corps?

Here are a few reasons why founders love an S-Corps set up:

✔️ Tax Savings

With an S-Corp, you pay payroll taxes (Social Security + Medicare) only on your W-2 salary, not on the entire business profit. 

The leftover profit you take as distributions avoids those payroll taxes (you still pay income tax).

Quick example: If your business earns $150k and you set a $80k salary, only that $80k faces payroll taxes. The remaining $70k is typically distribution.

✔️ Limited Liability

An S-Corp is still a corporation. Your personal assets (home, car, savings) are shielded from business debts and lawsuits, same core protection you’d expect from an LLC or C-Corp, assuming you keep clean books and don’t mix personal and business money.

✔️ Credibility

“Inc.” on your paperwork, W-2s, payroll, and formal records can signal maturity to clients, banks, and partners. It often helps with vendor accounts, financing, and bigger-ticket clients who prefer incorporated vendors.

✔️ Ownership Flexibility

You can have up to 100 shareholders, and they must be U.S. citizens or residents. There’s only one class of stock (everyone owns the same type of shares), which keeps things simple for taxes and distributions.

There Are Over 5 Million S-Corps in the U.S.! According to the IRS’s latest data, S-Corps make up more than 70 % of all U.S. corporations, and collectively they employ tens of millions of people. They’re by far the most popular business structure for small and midsize companies.

But There Are Rules For Qualifying As An S-Corp

An S-Corporation isn’t a business type you automatically get when you register your company, it’s a special tax status granted by the IRS.

And to qualify for it, your business must meet certain rules. If you miss even one, the IRS can reject your S-Corp election.

Here’s what you need to know:

You Must Be a US-Based Business

Your company has to be formed in the United States, either as a domestic corporation or an LLC that elects to be taxed as a corporation first. Foreign corporations or non-U.S. entities can’t apply for S-Corp status.

You Can Have Only One Class of Stock

Every shareholder must have equal rights to profits and distributions.
That means:

• You can’t issue “preferred” shares or create multiple profit-sharing tiers.

• You can have voting and non-voting stock, but everyone must receive the same type of financial benefit.

Shareholders Must Be Eligible Individuals

Owners (shareholders) have to be real people, not corporations, partnerships, or most LLCs. And they must be U.S. citizens or permanent residents.

No foreign investors allowed under S-Corp rules.

You’re Limited to 100 Shareholders

S-Corps are meant for small businesses, so the IRS caps the number of shareholders at 100. If you go above that, your S-Corp status can be revoked.

We hope you now have clarity about S-Corps and how you can be taxed in this business set up. Let’s go step ahead and understand how you can get paid.

How To Pay Yourself As An S-Corp Owner

As mentioned earlier, in an S-Corp, you’re both an employee and an owner. We’ll now show you precisely how to pay yourself the right way.

1) Salary (W-2 Income)

If you actively work in the business, the IRS expects you to pay yourself a reasonable salary as an employee and run it through payroll (with withholdings and employer payroll taxes). This creates a W-2 at year-end.

How to determine what’s “reasonable” (S Corp reasonable salary): “Reasonable compensation” isn’t a fixed percentage; it’s based on facts and circumstances. 

You’ll be benchmarked against:

• Role & duties (what you actually do)

• Industry & geography (market pay for similar roles)

• Experience & qualifications

• Time devoted (full-time vs part-time)

Document your sources (BLS/salary surveys), your role, and your hours. The IRS and professional guidance emphasize that wages must come before distributions. 

How payroll taxes apply: Your W-2 wages are subject to income tax and FICA payroll taxes (Social Security and Medicare), with both employee and employer portions handled via payroll filings (e.g., Forms 941/W-2). This is the “salary” side of the S Corp salary vs distributions split.

Practical Setup: How To Pay Yourself The Right Way

1. Choose How Often You’ll Pay Yourself

You can run payroll monthly or every two weeks (bi-weekly). It doesn’t matter when,  as long as you’re consistent.

The IRS cares about regularity, not the exact schedule. If your cash flow is unpredictable, start monthly and adjust later.

2. Use a Payroll Platform, Don’t DIY

Skip the spreadsheets. Use software like doola, Gusto, QuickBooks Payroll, or ADP. They’ll will help you handle tasks like:

• Calculating your withholdings (income tax, Social Security, Medicare)

• Filing quarterly forms (941, W-2, etc.)

• Paying the IRS automatically

You just set your salary amount, frequency, and let the system run.

3. Write Down Why You Picked That Salary

The IRS expects a “reasonable salary.” That means your pay should look fair compared to what someone else in your role would earn.

Keep a one-page note in your business folder that says:

• What your job involves (marketing, management, tech, etc.)

• What others in your industry earn (pull data from Glassdoor or BLS)

• The exact salary you chose

That’s your “reasonable salary memo.” It’s proof that you’re playing fair.

4. Run Payroll First, Then Take Distributions

If you own an S-Corporation, it’s important to remember the order in which you pay yourself from the business:

✔️ Salary (W-2 Income)

You must pay yourself a reasonable salary first. This is considered a “Wages Expense” for the business and is subject to payroll taxes (like Social Security and Medicare).

✔️ Profit Check/Owner’s Distribution

Only after your salary is paid and all necessary taxes have been withheld, if the business still has remaining profit, you can take an “owner’s distribution” (sometimes called an S-Corp owner draw).

Key Difference for Bookkeeping:

• Salary is recorded as a business expense (“Wages Expense”).

• Distribution is recorded under equity as “Shareholder Distribution.” It is not a business expense, and it is not subject to self-employment taxes. This is where the S-Corp tax benefit comes from.

But, never mix the two.

2) Owner’s Distributions (Profit Share)

Once you’ve paid yourself a reasonable W-2 salary, the next step is where most S-Corp owners enjoy the real benefit, taking owner’s distributions, also known as an S-Corp owner draw.

What Are S-Corp Distributions?

An S-Corp owner’s distribution is essentially your personal share of the company’s profit that you take after the company has paid all its operating costs, taxes, and the salary you pay yourself as an employee. 

It is considered a return on your investment in the company, not payment for the work you do. You can only take a distribution if the business has a net profit (Revenue minus all Expenses, Salary, and Taxes).

When and How to Take Distributions

There is no strict, mandatory schedule for when you must take money out of your S-Corp as a distribution. You have flexibility and can choose to take distributions monthly, quarterly, or annually. 

The frequency should align with your business’s predictable cash flow and the efficiency of your internal bookkeeping and accounting systems.

However, the steps for an S-Corp owner to take a distribution must be followed in this specific order:

1. Prioritize Your W-2 Salary: First and foremost, you must pay yourself your pre-determined, reasonable W-2 shareholder-employee salary. This is a mandatory business expense.
2. Confirm Actual Profit: Only after all business expenses, including your W-2 salary, have been accounted for, must you confirm that the business has a genuine net profit.
3. Transfer the Profit: Once a clear profit is established, you can then transfer that specific profit amount from your official business bank account into your personal bank account.

Record-Keeping is Key

You must accurately document this transfer in your accounting records. It should be categorized as a Shareholder Distribution under the equity section of your balance sheet.

 It is critical that you do not record this transfer as a business expense, as distributions are a division of profit, not a cost of doing business.

 Best Practices for S-Corp Owner Draws

Here are a few best practices that you can implement to draw profit as an owner:

1. Verify Profit Before You Withdraw

Before taking money out, confirm your business is actually profitable after expenses, taxes, and your W-2 salary. Look at your profit and loss statement, not just your bank balance, having cash doesn’t always mean you have profit.

If you withdraw during a loss, you can reduce your shareholder basis and even make part of your draw taxable (you’re basically taking money that doesn’t exist on paper). 

The safest routine should be in this order: run payroll → close your books for the month → check profit → then take a draw.

2. Keep Distributions Proportional

If you have multiple shareholders, every distribution must follow the ownership percentages exactly.

For example, if you own 60% and your partner owns 40%, every profit draw must follow that same ratio.

Unequal payouts create what the IRS calls a “second class of stock,” which violates S-Corp rules and can cause you to lose S-Corp status entirely.

If one owner needs extra funds, record it as a loan from the business (written terms, repayment schedule, interest) instead of a one-off cash grab.

3. Keep Business And Personal Finances Separate

Never pay personal bills directly from the business account.

When you want to take money, do a clean transfer from your business to your personal account labeled “Shareholder Distribution.” This clear separation keeps your books accurate and protects your limited liability.

If you blur the line between business and personal money, it can look like you’re abusing the corporate structure,  and that protection could trigger a lawsuit or an audit.

4. Record And Track Every Draw

Every time you take an owner draw, record it in your accounting software under Equity → Shareholder Distributions. It’s not a business expense and should never run through payroll.

This record becomes important during tax season because your accountant uses it to prepare your Schedule K-1, which reports your share of profit and distributions.

Keeping those entries clean means faster filing and fewer questions from the IRS.

Tax Implications of Paying Yourself

Let’s break down how your salary and distributions are taxed differently, and what that means for your bottom line. 

1. The Salary Portion: Subject to Payroll (FICA) Taxes

Like we mentioned earlier, when you pay yourself through payroll, it’s considered W-2 income. That means your salary is subject to FICA taxes, which stands for the Federal Insurance Contributions Act.

Basically, it’s how you and your business fund Social Security and Medicare.

• Social Security: 12.4% total (split 6.2% employer + 6.2% employee)

• Medicare: 2.9% total (split 1.45% employer + 1.45% employee)

In other words, the business pays half, and you (as the employee) pay the other half through withholding.

Your salary also counts as a deductible expense for the S Corp, which lowers the company’s taxable profit. This is the foundation of S Corp payroll taxes,  it’s what makes your W-2 income fully compliant.

2. The Distribution Portion: Not Subject To Self-Employment Tax

Distributions are not subject to FICA or self-employment tax.

You still pay income tax on the total profit (reported on your personal tax return via Schedule K-1), but you can skip those payroll taxes completely.

3. Paying Quarterly Taxes On Distributions

Here’s the catch: your payroll taxes are automatically handled through payroll software (they’re withheld and filed for you). But distributions don’t have any automatic withholding.

You have to pay estimated quarterly taxes on that money yourself.

Think of it this way: your W-2 salary takes care of itself; your distributions don’t.

So, you’ll make four estimated tax payments each year — usually due on April 15, June 15, September 15, and January 15, using IRS Form 1040-ES.

💡 Here’s a simple rule you can follow: Set aside 25–30% of every distribution for federal and state income taxes so you don’t get surprised at year-end.

What You’ll File At The End Of The Year When tax season rolls around, your S Corp and you (the shareholder) will handle a few key forms: ✔️ Form W-2: Shows your salary and tax withholdings (just like any job). ✔️ Form 1120-S: The S Corp’s annual tax return summarizing income, expenses, and profits. ✔️ Schedule K-1: Reports each shareholder’s share of profit, losses, and distributions. You’ll attach this to your personal tax return.

Red Flags & Common Mistakes That Trigger IRS Trouble

Here’s what not to do when you are paying yourself as an S-Corp if you want to stay from penalties:

🚩 Small salary, large distributions

Paying yourself a very small salary (e.g., $10k) while taking large distributions (e.g., $100k) suggests tax avoidance. The IRS may reclassify your distributions as wages and assess back taxes, penalties, and interest. 

🚩 Taking distributions without profit

If you take distributions when your S-Corp has a loss, you may encounter issues and could owe tax on funds you didn’t actually earn.

🚩 Lack of proper records

Skipping payroll or not documenting transactions correctly makes your S-Corp resemble a sole proprietorship, which undermines the purpose of the S-Corp structure.

Quick 60 Seconds Self-Audit 👉🏼 Do your books show profit before each draw? 👉🏼 Is your salary reasonable and paid regularly? 👉🏼 Are distributions proportional to ownership? 👉🏼 Are draws posted to Equity, not expenses? 👉🏼 Are business and personal funds fully separate? 👉🏼 Is basis not going negative (ask your CPA if unsure)? Bottom line: Salary pays you for your work. Distributions pay you for ownership. Keep those lanes clean, document the “reasonable salary,” and only draw from profit, you’ll stay compliant and avoid IRS headaches.

📌 Learn more: What Type of Business Entity Should You Form?

How doola Helps You Pay Yourself the Right Way

If you’re a founder cruising the intricate landscape of S-Corp structure, payroll, and tax compliance, doola is here to simplify your entire journey, right from formation to distributions.

Here’s what we offer under doola S Corp formation services:

🎯 Entity Formation + S-Corp Election

🎯 EIN + Business Banking Coordination

🎯 Bookkeeping, Tax Filing & Ongoing Compliance

🎯 Real Value for Founders

Sign up and understand your next steps!

FAQs

How much should I pay myself as an S Corp owner?

You need to pay yourself a “reasonable salary”, basically, what you’d have to pay someone else to do your job. The IRS usually checks this against:

• What similar businesses pay for the same work

Most founders land somewhere between 40–60% of profits as salary, but it’s case-by-case. After your salary is set, the remaining profit can be taken as distributions, which are not subject to self-employment tax.

Can I pay myself only through distributions to avoid taxes?

No. That’s an instant IRS red flag.

If you work in the business, the IRS requires that you take a salary first. If you only take distributions, the IRS can:

• Reclassify your distributions as wages

• Charge back taxes + penalties + interest

So, the safe rule is salary first, distributions second.

What happens if I don’t pay myself a salary in my S Corp?

If the IRS audits you, they can argue you’re avoiding payroll taxes. That usually results in:

• Penalties for failing to withhold

It’s not worth the risk. Even a modest salary is better than skipping it.

Do I need to use payroll software to pay myself as an S Corp owner?

Technically you can run payroll manually, but you really shouldn’t. Payroll comes with:

• Withholding federal & state taxes

• Filing quarterly payroll reports

• Keeping clean compliance records

Using software (or a service) makes sure you don’t miss filings or miscalculate taxes.

How do S Corp distributions work if I have multiple owners?

Distributions must follow ownership percentage, not effort, not “who worked harder,” not who needs cash right now.

So, if you own 60% and your co-founder owns 40%, distributions must always be split 60/40, no exceptions.

Salary, however, can differ based on each founder’s role and responsibilities.

Can I change my salary later if my business revenue grows?

Yes, absolutely. Your salary should evolve as the business evolves.

Typical reasons to adjust salary include:

• You’re working more hours

• You’re taking on a bigger role

• You want to increase (or reduce) distributions

Just make sure changes are documented, ideally in meeting notes or a board resolution.

How can I pay myself as a non-U.S. founder with a U.S. S Corp?

Here’s the catch: Non-U.S. founders generally cannot own S Corps.

To qualify, shareholders must be:

• U.S. residents (Green Card or certain residency tests)

If a non-U.S. founder becomes a shareholder, the S Corp automatically loses its S Corp status and becomes a C Corp for tax purposes.

So, the real answer is:

Non-U.S. founders cannot pay themselves from an S Corp because they can’t own one in the first place.

If you’re helping founders internationally, this is where you nudge them: Most non-U.S. founders choose LLCs or C Corps instead, where paying themselves is much simpler.