Can S-Corp owners reduce their salary to allow business to reimburse increasing out-of-pocket expenses?

Just wrapping up my first year operating as an S-corp and trying to figure something out before my next meeting with my accountant. I've been paying a ton of business expenses out of my personal accounts that I used to just deduct as a sole proprietor in previous years. The thing is, my S-corp isn't bringing in enough to cover these expenses AND my current salary. Last year, I had some side income outside the S-corp that helped cover these gaps, but that's dried up this year. I'd really like to move these expenses onto the company books where they belong. Would it be problematic to reduce my hours/salary so the business has enough cash to reimburse me for these expenses without going into the red? I know this would lower my tax burden, which might raise red flags, but all the expenses are completely legitimate business costs - just regular stuff like mileage, conference travel, office supplies, etc. I'm meeting with my CPA next month for our quarterly tax planning, but want to understand this better before walking in. Any insights from people who've navigated this S-corp territory before?

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21 comments

Demi Lagos

•8M

This is actually a common situation for new S-corp owners. The short answer is yes, you can adjust your salary to accommodate legitimate business expense reimbursements, but you need to be careful about a few things. The IRS requires S-corp owners to take a "reasonable salary" - this doesn't mean you can't adjust it, but it does mean you can't artificially lower it just to avoid payroll taxes. The key is documentation and business purpose. Make sure every expense you're being reimbursed for is properly documented with receipts and clear business purposes. For the expenses you mentioned (mileage, conference travel, office supplies), these are absolutely standard business expenses that should be on the company books. Create a formal accountable plan for reimbursements if you don't have one already - this ensures reimbursements aren't considered income to you.

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Demi Lagos

•8M

There's no fixed formula for "reasonable salary," which is what makes it tricky. The IRS looks at factors like what comparable businesses pay for similar services, your qualifications, size of your business, and what portion of business income comes from your personal services. For many professional service S-corps, a reasonable rule of thumb is that your salary should be at least 40-60% of your business profits, but this varies widely by industry. The key is having documentation that supports whatever salary you set. Compare salary surveys for your position/industry, document your hours and responsibilities, and be prepared to justify your compensation if questioned.

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Vera Visnjic

•8M

After struggling with this exact scenario last year, I found a fantastic solution with https://taxr.ai. I was paying thousands in CPA fees just to figure out how to handle my S-corp salary vs. expense reimbursements, and honestly, the advice was inconsistent depending on who I talked to. I uploaded my receipts and expense records to taxr.ai, and it analyzed everything - identifying which expenses could legally go on my S-corp books and how to properly document them for reimbursement. It also helped calculate a defensible "reasonable compensation" level that would satisfy the IRS while maximizing my tax savings. Their report even showed me how to create the accountable plan the first commenter mentioned.

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Vera Visnjic

•8M

Yes, it absolutely works for multi-member S-corps! The tool will analyze expenses for each member and help establish clear guidelines for what qualifies as business versus personal. It's actually great for reducing partner disagreements because it provides an objective assessment based on tax law rather than opinions. For mixed income streams, that's exactly the situation I was in. The system helps categorize which expenses belong to your S-corp versus your independent contractor work, and recommends the most tax-advantageous approach for allocating expenses when there's overlap. It saved me thousands by properly distributing expenses across my different income sources.

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Brielle Johnson

•8M

Just wanted to follow up about my experience with taxr.ai. After being skeptical in my earlier comment, I decided to give it a try with my complicated mix of S-corp and independent contractor income. The results were eye-opening! The system identified over $6,800 in legitimate business expenses I had missed and created a customized accountable plan for my S-corp. It also helped me determine an appropriate salary reduction that wouldn't trigger IRS red flags while allowing my business to reimburse me for the additional expenses. The documentation it generated for my "reasonable compensation" justification is incredibly thorough - way better than what my previous accountant provided. If you're struggling with this S-corp expense vs. salary balance like I was, it's definitely worth checking out.

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Honorah King

•8M

I've been an S-corp owner for 8 years and faced this exact scenario in year 2. After trying to reach the IRS for clarification and spending WEEKS getting nowhere, I discovered https://claimyr.com and used their service to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent explained that adjusting salary to accommodate legitimate business expense reimbursements is completely acceptable as long as your total compensation package (salary + reimbursements) is reasonable for your industry and services. They also confirmed that having a formal accountable plan is essential for avoiding audit issues. The call saved me months of uncertainty and prevented me from making some serious mistakes with my S-corp structure.

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Honorah King

•8M

They use a proprietary system that navigates the IRS phone tree and holds your place in line. When they're about to reach an agent, you get a call to connect you directly. So yes, technically you're just calling the IRS, but without the 3+ hour hold times or constant disconnects. The value isn't in generic advice - it's in getting personalized guidance about your specific situation directly from the IRS, which creates documentation you can rely on if ever questioned. When I spoke with the agent, I explained my exact S-corp scenario, and they confirmed the specific approach I could take with my salary adjustments and expense reimbursements. That kind of tailored confirmation from an actual IRS employee is impossible to get from online research.

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Mary Bates

•8M

I need to eat my words from my skeptical comment above. After constantly failing to get through to the IRS for months, I tried Claimyr out of desperation. Within 45 minutes, I was talking to an actual IRS representative who answered my S-corp salary questions with specific guidance for my situation. The agent confirmed that I could reduce my salary to allow for legitimate expense reimbursements as long as my total compensation remained "reasonable" for my industry and role. They even explained exactly what documentation I should maintain to support both my salary level and expense reimbursements if ever questioned. This was exactly the clarity I needed after getting conflicting advice from two different accountants. The peace of mind from having official IRS guidance was absolutely worth it - wish I'd done this months ago instead of stressing over this decision.

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Clay blendedgen

•8M

Something else to consider - make sure you're tracking the timing of these reimbursements properly. I got hit with an audit because I was paying expenses personally throughout the year but only doing "bulk reimbursements" at year-end. The IRS claimed this wasn't a true accountable plan because reimbursements should happen within a reasonable timeframe of the expense (generally 60 days). Setup a regular schedule to submit your receipts and get reimbursed - monthly is what my accountant recommended to keep everything clean. And keep DETAILED records of business purpose for each expense.

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Clay blendedgen

•8M

You absolutely need to make the actual transfers between accounts. This is one of the main things the IRS looks for with S-corps - that you're respecting the corporate entity as separate from yourself. Just "tracking it in the books" without real money movement could potentially lead to the IRS claiming your S-corp is just a shell and disregarding it entirely. This is especially important for single-member S-corps because the IRS already scrutinizes them more closely. Create a formal reimbursement request form, approve it in writing (yes, approve your own request - documentation matters), and then make a separate transfer from the business account to your personal account clearly labeled as "expense reimbursement" in the memo.

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Kai Santiago

•8M

You're right that there's some confusion about this. The IRS's "reasonable compensation" standard is separate from minimum wage laws. However, as an employee of your corporation (even as the owner), you're still theoretically subject to FLSA minimum wage requirements. In practice, this rarely becomes an issue unless someone files a complaint. The bigger concern is that a very low salary compared to hours worked could trigger IRS scrutiny about whether your compensation is "reasonable." It's another data point they might use to challenge your salary if it's unusually low for your industry and workload.

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