Determining Salary and Distributions from Your S Corporation

Freelancers and small business owners can gain a significant tax advantage by electing S Corporation status. This allows owners to avoid the 15.3 percent self-employment tax. This comes with a catch: the Internal Revenue Code (federal tax law) requires S Corporation owners to pay themselves a “reasonable salary,” from which they must withhold income taxes and submit payroll (FICA and unemployment) taxes. This post discusses how the IRS defines a reasonable salary and how you can determine your own.