Is there a percentage rule for an S-Corp reasonable salary, like 60/40?

No. The 60/40 split and other percentage shortcuts are rules of thumb people repeat, not law — neither the tax code nor the IRS endorses any fixed percentage. IRS Fact Sheet 2008-25 says reasonable compensation is a facts-and-circumstances determination based on the work you actually perform, and the courts have consistently valued the services rather than applying a formula. A percentage can be a sanity check, but the defensible number comes from what a comparable employee doing your job would be paid, not from a share of your profit.

What happens if I pay myself too little and the IRS notices?

The IRS can recharacterize your distributions as wages up to a reasonable amount, then bill the S-Corp for the Social Security and Medicare taxes that should have been withheld — 15.3% on the recharacterized wages up to the Social Security wage base — plus interest and payroll penalties. In the leading case, David E. Watson, P.C. v. United States (8th Cir. 2012), a CPA who paid himself $24,000 while taking roughly $200,000 in distributions had his reasonable salary reset to $91,044, and the court upheld the back FICA taxes and penalties. Paying zero salary while taking distributions is the single biggest audit flag.

How do I actually calculate a defensible reasonable salary?

The most defensible method for an owner-operator is the cost approach: list every role you fill — technician, manager, salesperson, bookkeeper — estimate the hours you spend in each, and price each block of hours at what the local market pays someone to do only that job. Add them up and that total is your salary. The market approach — pulling comparable salary data for your title, industry, and region — works as a cross-check. Whichever you use, write down the inputs the year you set the number, because the IRS evaluates the reasoning, not just the result.

Can paying myself a higher salary ever save me money overall?

Sometimes, yes. A higher W-2 salary costs you payroll tax, but it also raises the ceiling on employer retirement contributions (a Solo 401(k) or SEP-IRA employer contribution is a percentage of W-2 wages), builds your future Social Security benefit, and can affect your Section 199A qualified business income deduction. For higher-income owners the 199A wage limitation can actually reward paying more W-2 wages. The goal is not the lowest possible salary — it is the number that is both defensible and optimized across payroll tax, retirement, and the QBI deduction together.

Does living in Florida change my reasonable salary calculation?

Florida has no personal income tax, so the reasonable salary decision is a purely federal one — there is no state salary-versus-distribution consequence to model, which makes the math cleaner here than in most states. What does not change is the federal payroll tax at stake: the 2026 Social Security wage base is $184,500, and every dollar of defensible salary below that carries 12.4% Social Security plus 2.9% Medicare. The Central Florida labor market still matters, though, because comparable local pay is one of the IRS factors for what your services are worth.

S-Corp Reasonable Salary: A Florida CPA's Guide

Setting a Reasonable Salary for Your S-CorpBy Timothy LeGendre, CPA · Florida License #AC62625 · Last reviewed 2026-07-02A Florida CPA's guide to setting a defensible S-Corp reasonable salary: the IRS factors, valuation methods, documentation, and audit risk.An S-Corp reasonable salary is the wage the IRS expects an owner-employee to pay themselves for the work they perform before taking profit as a distribution. Wages carry Social Security and Medicare tax; distributions do not — which is why the IRS scrutinizes the split. There is no legal percentage: the '60/40 rule' is a myth, and IRS Fact Sheet 2008-25 treats reasonable compensation as a facts-and-circumstances question built from nine factors, nearly all pointing to the value of the services performed. For tax year 2026 the Social Security wage base is $184,500, so each dollar of salary below it carries the full 15.3% combined payroll tax. A defensible number is best built with the cost approach — pricing each role you fill at market hourly rates for the hours worked — and documented in a short contemporaneous file (role description, comparable pay data, the calculation, the date). The cautionary case is David E. Watson, P.C. v. United States (8th Cir. 2012): a CPA paid himself $24,000 while taking about $200,000 in distributions, and the courts reset his reasonable salary to $91,044 with back FICA and penalties. Paying too little also backfires beyond audit risk — it caps Solo 401(k)/SEP-IRA employer contributions, can shrink the Section 199A QBI deduction for higher earners, and lowers future Social Security benefits. Florida's lack of a state income tax makes the entire decision federal.

Frequently asked questions

Is there a percentage rule for an S-Corp reasonable salary, like 60/40?: No. The 60/40 split and other percentage shortcuts are rules of thumb people repeat, not law — neither the tax code nor the IRS endorses any fixed percentage. IRS Fact Sheet 2008-25 says reasonable compensation is a facts-and-circumstances determination based on the work you actually perform, and the courts have consistently valued the services rather than applying a formula. A percentage can be a sanity check, but the defensible number comes from what a comparable employee doing your job would be paid, not from a share of your profit.
What happens if I pay myself too little and the IRS notices?: The IRS can recharacterize your distributions as wages up to a reasonable amount, then bill the S-Corp for the Social Security and Medicare taxes that should have been withheld — 15.3% on the recharacterized wages up to the Social Security wage base — plus interest and payroll penalties. In the leading case, David E. Watson, P.C. v. United States (8th Cir. 2012), a CPA who paid himself $24,000 while taking roughly $200,000 in distributions had his reasonable salary reset to $91,044, and the court upheld the back FICA taxes and penalties. Paying zero salary while taking distributions is the single biggest audit flag.
How do I actually calculate a defensible reasonable salary?: The most defensible method for an owner-operator is the cost approach: list every role you fill — technician, manager, salesperson, bookkeeper — estimate the hours you spend in each, and price each block of hours at what the local market pays someone to do only that job. Add them up and that total is your salary. The market approach — pulling comparable salary data for your title, industry, and region — works as a cross-check. Whichever you use, write down the inputs the year you set the number, because the IRS evaluates the reasoning, not just the result.
Can paying myself a higher salary ever save me money overall?: Sometimes, yes. A higher W-2 salary costs you payroll tax, but it also raises the ceiling on employer retirement contributions (a Solo 401(k) or SEP-IRA employer contribution is a percentage of W-2 wages), builds your future Social Security benefit, and can affect your Section 199A qualified business income deduction. For higher-income owners the 199A wage limitation can actually reward paying more W-2 wages. The goal is not the lowest possible salary — it is the number that is both defensible and optimized across payroll tax, retirement, and the QBI deduction together.
Does living in Florida change my reasonable salary calculation?: Florida has no personal income tax, so the reasonable salary decision is a purely federal one — there is no state salary-versus-distribution consequence to model, which makes the math cleaner here than in most states. What does not change is the federal payroll tax at stake: the 2026 Social Security wage base is $184,500, and every dollar of defensible salary below that carries 12.4% Social Security plus 2.9% Medicare. The Central Florida labor market still matters, though, because comparable local pay is one of the IRS factors for what your services are worth.