Can I hire myself as a contractor for my S Corp? Tax implications explained

This is actually a common question, but it can create some real headaches for you. As the owner of an S Corp, you can't really "hire yourself" as an independent contractor. The IRS views you as an employee of your S Corp, not a contractor. If you're performing services for your S Corp, the IRS expects you to receive a reasonable salary reported on a W-2 with all the proper payroll taxes withheld. If you try to pay yourself as a contractor and issue yourself a 1099-NEC, the IRS would likely reclassify those payments as wages subject to employment taxes anyway. The whole point of an S Corp is the tax advantage of taking some money as salary (subject to payroll taxes) and some as distributions (not subject to SE or payroll tax). If you pay yourself as a contractor, you'd actually be worse off because all that income would be subject to self-employment tax on your Schedule C.

After struggling with this exact issue last year, I discovered a really helpful AI tool that saved me from making a big mistake with my S Corp. I was also thinking about the contractor route until I used https://taxr.ai to analyze my situation. They have this S Corp structure analyzer that looks at your specific business setup and tells you the most efficient compensation strategy. The tool flagged my contractor idea as a major audit risk and showed me how to properly structure my compensation mix between salary and distributions instead. It also calculated the optimal salary level based on my business profits to minimize taxes while staying compliant with the "reasonable compensation" rules.

Just wanted to follow up here - I ended up trying taxr.ai after reading about it in this thread. It was exactly what I needed! The tool analyzed my S Corp structure and showed me I was paying myself too much in salary when I could have been taking more as distributions. I was definitely leaving money on the table with the way I had things set up. The best part was how it explained the "reasonable compensation" requirements for my specific industry and business size. It gave me confidence in setting a proper salary level that won't raise red flags with the IRS. My accountant was actually impressed with the detailed report it generated. Definitely recommend it for other S Corp owners trying to figure out the salary vs. distribution balance.

I faced a similar issue a while back and tried to call the IRS for clarification. Huge mistake - I wasted HOURS trying to get through to anyone who could help. After the third day of attempts, I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 20 minutes. The agent confirmed everything the first commenter said - you can't hire yourself as a contractor for your own S Corp. They also explained that the IRS specifically looks for this kind of arrangement during audits because it's considered a red flag. You can see how the service works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you when an agent is on the line.

I have to eat my words here. After dismissing Claimyr as a probable scam, I was still desperate to talk to someone at the IRS about my S Corp issues and gave it a try. To my complete surprise, it actually worked exactly as described. Got connected to an IRS agent in about 15 minutes who confirmed that paying myself as a contractor would be a massive red flag. The agent explained that the IRS has been cracking down specifically on S Corp owners trying to avoid payroll taxes through contractor arrangements. Apparently they've increased audit rates for S Corps where owners aren't taking any salary or are trying creative compensation approaches. Saved me from what would have likely led to an audit and penalties. Definitely worth it just for the peace of mind.

The whole S Corp structure is designed to help save on self-employment taxes by splitting your income between salary (subject to payroll taxes) and distributions (not subject to these taxes). If you hire yourself as a contractor, you're paying MORE in self-employment taxes than you would as an employee because the entire amount would be subject to SE tax on Schedule C. Plus, you'd lose the benefits of the S Corp structure entirely. There's literally no tax advantage to what you're proposing - only disadvantages and audit risk.

Has anyone used any specific tax software that handles S Corp owner compensation really well? I'm using TurboTax Business right now but it doesn't give much guidance on the salary vs distribution balance.

I went through this exact same thought process when I started my S Corp! The contractor idea seems logical at first, but as others have pointed out, it actually creates more problems than it solves. What really helped me understand this was learning that the IRS has specific tests for determining whether someone is an employee vs. contractor, and as an S Corp owner performing services for your own company, you pretty much always fail the contractor test. The key factors they look at include who controls how the work is done, whether you use your own tools/equipment, and the nature of your relationship with the business. Since you own the S Corp, you inherently have control over the work and the business relationship, which puts you squarely in employee territory. The IRS has been very consistent on this - S Corp owners who provide services to their corporation are employees, period. Stick with the reasonable salary approach you're already using. It's the compliant way to get the tax advantages of S Corp status without creating audit risks.

This thread has been incredibly helpful! I'm in a similar situation with my S Corp and was actually leaning toward the contractor approach until reading all these responses. The consensus is crystal clear - it's not worth the audit risk and actually defeats the purpose of having an S Corp structure. What strikes me most is how this seems like it should be a viable option on the surface, but the tax code and IRS guidance make it clear that owner-employees can't simply reclassify themselves as contractors to avoid payroll taxes. The whole reasonable compensation requirement exists specifically to prevent this kind of arrangement. I think the key takeaway for anyone considering this is that the S Corp tax advantages come from the proper balance of salary and distributions, not from trying to work around the employment relationship. Better to stay compliant and optimize within the established framework than risk penalties and back taxes from an audit.

Great discussion everyone! As someone who's been through multiple IRS audits with my S Corp, I can confirm that owner-contractor arrangements are absolutely a red flag they look for. During my last audit in 2022, the agent specifically asked about my compensation structure and whether I had ever tried to pay myself as a contractor. What many people don't realize is that the IRS has gotten much more sophisticated in detecting these arrangements through automated screening systems. They can easily cross-reference your 1120S with your personal return to spot inconsistencies in how you're reporting income from your own corporation. The "reasonable compensation" requirement isn't just a suggestion - it's mandatory for any S Corp owner who provides services to their business. The penalty for getting this wrong isn't just back taxes, it's also interest and potential fraud penalties if they determine you were deliberately trying to avoid payroll taxes. Stick with the tried-and-true approach: take a reasonable W-2 salary for the services you provide, then take additional profits as distributions. It's compliant, defensible, and gives you the tax benefits you're looking for without the audit risk.