How to Pay Yourself as an S Corp Owner
Reasonable salary through payroll, then distributions. What "reasonable" means, mistakes the IRS looks for, and how to set it up in Gusto.
Written guide
Pay yourself as an S corp owner
If your business is taxed as an S corp, the rules for paying yourself are different, and getting them wrong can cost you. Here's how it works, and how to do it in Gusto.
The S corp rule
The rule is simple. If you work in your S corp, you must pay yourself a reasonable salary through payroll first. After that, you can take extra profit as distributions.
The S corp setting
In Gusto, this lives in your federal tax setup. Here's the S corporation taxation setting. This business says no. An S corp owner would have it set to yes, so Gusto treats owner pay correctly.
Why owners choose an S corp
Why do owners choose this? Your salary gets normal payroll taxes, but distributions don't get Social Security or Medicare tax. That's where the savings come from. Income tax still applies to both.
What's "reasonable"?
So what's reasonable? There's no fixed formula. It's based on your role, hours and duties, what you'd pay someone else to do your job, pay for similar work in your industry, and what the business can afford.
Don't lowball your salary
Don't lowball it. The popular sixty forty split is just a rule of thumb, not an IRS rule. If your salary is too low, the IRS can treat your distributions as wages and add penalties and interest.
Add yourself as an employee
Step two. In Gusto, add yourself as an employee under People, just like any other team member. You fill out your own W 4 and set your salary.
Put your salary on AutoPilot
Step three. Run payroll for yourself on a regular schedule. Since a salary doesn't change, you can turn on AutoPilot and Gusto runs it, withholds the taxes, and files them for you.
Take distributions
Step four. Take distributions separately, as a transfer from the business account. They don't go through payroll, and if there's more than one owner, they're usually paid in proportion to ownership.
Gusto Solo
If it's just you, Gusto has a Solo plan made for paying yourself compliantly as an S corp. It also pays contractors and includes tax-saving tools.
Know the costs
Know the costs. An S corp means running payroll, filing a separate business return on Form eleven twenty S, and sometimes state fees. Ask a tax pro whether the savings beat the costs for you.
Recap
Quick recap. Pay yourself a reasonable salary through payroll, take the rest as distributions, run it on AutoPilot in Gusto, and keep good records. This is general information, not tax advice.
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