The S-Corp election saves money because you split your income into two buckets — a salary and distributions. But getting the split wrong puts you in IRS crosshairs. Here’s exactly how to pay yourself from an S-Corp correctly.

The Two-Bucket System

As an S-Corp owner-employee, your income splits into:

• Salary — paid via payroll, subject to income tax AND self-employment (payroll) tax. W-2 issued at year-end.
• Distributions — remaining profit paid to you as an owner. Subject to income tax only. No SE tax. This is where the savings live.

What Is a “Reasonable Salary”?

The IRS requires your salary to be “reasonable” — comparable to what you’d pay someone else to do your job in the open market. This isn’t optional. S-Corp owners who pay themselves too little get flagged, and the IRS can reclassify distributions as wages and assess back taxes, interest, and penalties. Too high and you’re voluntarily paying more SE tax than necessary. Your CPA finds the sweet spot — typically benchmarked against industry salary surveys like the BLS Occupational Employment Statistics.

The Math: Why It Matters

How to Actually Run Payroll as an S-Corp Owner

1. Set up payroll with a service (Gusto, QuickBooks Payroll, ADP) — don’t do this manually
2. Pay yourself on a regular schedule (bi-weekly or monthly) via direct deposit
3. File Form 941 quarterly — employer’s quarterly federal tax return
4. File Form W-2 and W-3 annually
5. Pay employer + employee portions of FICA taxes semi-weekly or monthly