S-Corp Owner Not Taking Salary or Distributions - Will IRS Flag This?

I've got a pretty solid day job making good money (well into six figures), but I'm also building up a side business that's starting to gain traction. My business has steady recurring revenue plus some larger contract payments, though I do have significant expenses paying other professionals who are operating as LLCs or S-Corps themselves. Here's my situation: I want to keep all profits in the business and not take any salary or distributions for the next 2-3 years. My goal is to build up enough capital in the company so that when I eventually feel confident enough to leave my day job and run this business full-time, I'll have a substantial runway to make it work. I know the IRS typically gets suspicious when S-Corp owners don't pay themselves a reasonable salary since that's a common way people avoid payroll taxes. But in my case, I'm already paying a ton in Social Security, Medicare, etc. through my full-time employer. So my question is - if I'm not taking any money out of my S-Corp for a few years while I build it up, will this get me and my corporation flagged for an audit? I'm not trying to avoid taxes - just trying to strengthen my business position before making the leap to full-time entrepreneurship.

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18 comments

Paolo Marino

•8M

This is actually a really common scenario for professionals starting side businesses. The IRS expects S-Corp owners who are providing services to take a "reasonable salary" for the work they do, but your situation has some nuance. The key issue isn't whether you're paying enough payroll taxes (which you already are through your day job), but rather whether you're providing significant services to the S-Corp without compensation. The IRS generally doesn't like to see services performed with zero compensation when profits exist. Even if you're not planning to take distributions, I'd recommend paying yourself at least a modest salary that's reasonable for the amount of time you're putting in. This doesn't have to be huge - it should just reflect the market value of your actual time contribution. This approach makes your stated business purpose (building capital) more defensible. If you truly take $0 in salary while the company generates profits, you're creating a potential red flag, even with your good intentions. The absence of ANY salary generally doesn't align with how the IRS expects S-Corps to operate.

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Paolo Marino

•8M

Yes, even for 5-10 hours weekly, you should take some salary. The key is that it should be "reasonable" for the services you're providing. For limited hours like that, you might look at what similar professionals in your field make hourly, then multiply by your actual hours. A common approach is to run payroll quarterly to minimize administrative burden while still satisfying the reasonable compensation requirement. This gives you a good balance between building capital and maintaining compliance. Many S-Corp owners in similar situations take just 20-30% of profits as salary, keeping the rest in the business for growth, though every situation is different.

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Amina Bah

•8M

After setting up my S-corp last year, I faced a similar dilemma and spent weeks trying to find clear guidance. I kept going in circles until someone recommended I try https://taxr.ai to analyze my situation. It was honestly a game-changer for my business planning. I uploaded my business formation docs and financial projections, and the AI analyzed my specific situation about reinvesting profits vs taking salary. It identified that I needed to take at least some minimal salary based on my service hours, even though I wanted to reinvest everything. The analysis referenced specific IRS revenue rulings that apply to S-corps with working shareholders who want to reinvest. The best part was getting clarity on exactly how much salary would be considered "reasonable" for my particular industry and time commitment without triggering audit concerns. Helped me strike the right balance between building capital and staying compliant.

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Amina Bah

•8M

It uses industry data combined with your specific situation to provide guidance. For me, it referenced average compensation rates for my industry and role, then adjusted based on the hours I reported working. It gave me both a percentage range and actual dollar amounts that would be considered reasonable. Regarding full-time employment elsewhere, it absolutely factors that in. It specifically analyzed a scenario where I already had Medicare/SS taxes covered from a day job, which actually helped justify a lower (but still reasonable) S-corp salary since tax avoidance wasn't my motivation. The analysis cited relevant tax court cases involving dual-income situations.

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Natasha Petrova

•8M

Just wanted to follow up about my experience with taxr.ai after our conversation here. I was dealing with almost the exact same situation - day job plus S-corp side business wanting to reinvest profits. I decided to try it, and the analysis was super helpful. It showed me that my situation actually has precedent in a few tax court cases where the IRS has been more flexible about "reasonable compensation" when the owner has substantial income elsewhere and is genuinely reinvesting for business growth rather than tax avoidance. The tool gave me specific documentation strategies to implement that support my business growth plan while minimizing audit risk. I've adjusted my approach based on the recommendations and feel much more confident now. Definitely worth checking out if you're in this situation.

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Javier Hernandez

•8M

Hey there, I went through exactly what you're describing last year. I wanted to build up capital in my S-Corp while keeping my day job, but I kept running into the brick wall of not being able to reach the IRS for clarification on what would be considered reasonable in my specific situation. After 4 attempts and hours on hold, I found https://claimyr.com which got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that while I needed to take some salary, I could justify a minimal one based on my limited hours and the fact that I was already paying maximum Social Security through my W-2 job. Most importantly, they explained exactly what documentation I should keep to support my business growth strategy if questioned later. That 45-minute conversation probably saved me thousands in potential penalties and gave me the confidence to move forward with my plan.

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Javier Hernandez

•8M

It absolutely works. The service basically keeps auto-dialing and navigating the IRS phone tree for you until it gets through, then calls you when an agent is on the line. It's like having someone else handle the frustrating part of waiting on hold. As for getting useful guidance, I think it depends on the agent you get and how you phrase your questions. I went in very prepared with specific scenarios and questions rather than asking for general advice. I asked things like "If I work 10 hours a week and reinvest all profits for these specific business purposes, would taking X% as salary be considered reasonable?" The agent was actually quite helpful when I framed it that way with specifics rather than generalities.

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LunarLegend

•8M

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I was getting nowhere with my S-corp salary questions. Got connected to an IRS representative in about 15 minutes (which already felt like a miracle after my previous attempts). The agent walked me through the "reasonable compensation" factors specific to my industry and hours worked. They explained that having substantial W-2 income elsewhere is actually considered when they evaluate S-corp compensation arrangements, and they helped me understand the documentation I should maintain to support my business reinvestment strategy. Most importantly, they confirmed that temporarily taking a smaller salary while building capital isn't automatically problematic as long as there's a legitimate business purpose and some reasonable compensation for actual services. Totally worth it and completely changed my understanding of my options.

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Malik Jackson

•8M

Something important that hasn't been mentioned yet - make sure you document everything about your business growth strategy. If you're keeping profits in the business for expansion, have a written business plan that outlines your capital needs, timeline for growth, and eventual transition strategy. This documentation becomes critical if you're ever questioned about why you took minimal/no salary. Courts have repeatedly sided with business owners who can demonstrate legitimate business purposes for retaining earnings versus those who just seem to be avoiding payroll taxes. Also, consider having your board of directors (even if it's just you wearing different hats) formally approve your compensation and capital retention strategy in corporate minutes. These formal governance steps make your intentions much clearer if scrutinized later.

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Malik Jackson

•8M

There's no required format, but I'd recommend including projected capital needs, specific growth milestones, timeline for expansion, and how the retained earnings will be used. Make it clear this is a temporary strategy until the business can support you full-time. Board approvals should definitely happen annually. At minimum, you should have annual minutes documenting review of the compensation strategy and business progress. Each year, note how the retained capital is being used toward your stated goals and reaffirm the strategy. This creates a pattern of consistent business purpose rather than looking like an afterthought if questioned.

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