Can I hire myself as a contractor for my S Corp: tax implications?

So does this mean you can NEVER do contract work for your own S Corp? What if i have a separate side business as a sole prop and want to bill some project work to my S Corp? Is that always disallowed?

You generally cannot be both an employee and independent contractor to the same business for the same type of work. The IRS looks at the relationship between the worker and the business, not how you label it. If you have a genuinely separate business that provides different services than what your S Corp does, it might be possible in limited circumstances. But even then, the IRS would scrutinize this arrangement closely. They're specifically looking for situations where people try to avoid payroll taxes by mischaracterizing the employment relationship.

How does this work exactly? Can it tell you what a "reasonable" salary should be? Because thats the part I struggle with the most for my s-corp.

Seems interesting but did it actually help with the audit itself or just for planning going forward? I'm dealing with some questionable advice I got from my previous accountant.

It actually analyzes financial data for your specific industry and provides customized salary recommendations based on your role and responsibilities. The report shows comparable salary ranges which is exactly what the IRS looks for when determining if your compensation is "reasonable." The service helped me during my audit by providing documentation that supported my amended filings. I was able to show the IRS agent that I was making good-faith efforts to correct my previous mistakes, which definitely helped reduce some of the penalties they were considering.

Is this legit? How does it actually get you through to the IRS when nobody else can get through?

Yeah right, sounds like snake oil to me. I've tried everything to get through to the IRS and nothing works. How could this possibly be different? And even if you do get through, is the advice from a random IRS phone person even reliable for this kind of specialized business question?

It basically uses an automated system to dial repeatedly and navigate the phone tree until it gets a spot in line, then it calls you to connect. It's not magic - just automated persistence in dealing with their system. When you consider the time value of making those calls yourself, it's a no-brainer. The IRS representatives are absolutely qualified to answer these kinds of questions. The person I spoke with was from their business tax department and specifically dealt with S Corporation compliance issues. She gave me crystal clear guidance backed by specific IRS publications that I could reference.

What counts as "reasonable"? Like if my business makes $300k, can I pay myself $50k salary and take $250k in distributions?

There's no exact formula because "reasonable" depends on your industry, skills, responsibilities, time commitment, and what similar positions would pay in your market. A $50k salary against $300k in profits would likely be considered too low in most circumstances. The IRS specifically looks for S Corps paying artificially low salaries to avoid payroll taxes. A common rule of thumb is that your salary should be at least 30-40% of your profits, but that varies widely. Some tax pros suggest looking at Bureau of Labor Statistics data for comparable positions in your industry and geographic area.

How much were the penalties? I think I might have messed this up last year but haven't heard anything from the IRS yet.

I had to pay about $3700 in penalties plus the additional employer-side payroll taxes I should have been paying all along. Plus I had to amend my personal return since I had incorrectly filed Schedule C income. The bigger hassle honestly was correcting all the paperwork and getting back in compliance. The IRS actually told me I was lucky they caught it early - apparently the penalties get much worse if they determine you're intentionally trying to avoid payroll taxes. They were reasonable since I could show it was a legitimate misunderstanding.

This is really helpful advice, thank you! I'm curious - when you say "reasonable salary," did you find any good resources for determining what that should be for IT consulting work? I'm worried about setting it too low and getting flagged, but also don't want to pay more payroll taxes than necessary. Did you use any specific benchmarking tools or just go with what similar W-2 positions pay in your area?

@f95cd05f9a9d Great question! When I went through this, I ended up using a combination of approaches. First, I looked at Bureau of Labor Statistics data for IT consultants in my metro area - that gave me a baseline range. Then I researched what similar W-2 positions were paying on sites like Glassdoor and Indeed. The key thing I learned is that your salary should reflect what you'd reasonably pay someone else to do the same work you're doing for the S Corp. So if you're doing high-level consulting work that would command $80-100k as a W-2 employee, you can't justify paying yourself $40k just to minimize payroll taxes. I ended up settling on about 60% of my total S Corp income as salary, with the rest as distributions. That felt defensible based on the market data I gathered. My CPA said that ratio was reasonable for someone who's essentially the sole revenue generator for their consulting practice. The IRS publication 15-A has some guidance on this, and definitely document your reasoning in case you ever need to justify it later!