One of the most common questions business owners ask is: “How do I pay myself the right way?” Done incorrectly, it can trigger IRS penalties or increase your tax bill.
The Importance of “Reasonable Compensation”
If you own an S-Corp, the IRS requires you to pay yourself a salary, not just take distributions. This salary must be “reasonable” based on your role and industry. Paying too little can raise red flags; paying too much can hurt cash flow.
Salary + Distributions: A Balanced Approach
Smart owners use a combination of salary and distributions:
- Salary: Covers your role, keeps you compliant, and pays into Social Security/Medicare. ● Distributions: Allow you to take profits without paying self-employment tax.
Common Mistakes to Avoid
- Only taking distributions (audit risk).
- Paying yourself 100% salary (unnecessary payroll taxes).
- Not documenting your pay structure.
Example
James, a Dallas marketing agency owner, was paying himself entirely through distributions. UDG helped restructure his pay with a salary + distributions model. Result: IRS compliance and $8,000 saved in payroll taxes.
Why Uptown Discovery Group?
We help business owners in Dallas and across all 50 states structure their pay properly while maximizing tax savings.
Ready to pay yourself the smart way? Schedule a strategy call with Uptown Discovery Group today.