S Corp - What's a Reasonable Salary for a Consultant w/ W-2 Job?

Hey everyone! I've gotten myself into a bit of a situation and could really use some advice. I set up an LLC last month after several people recommended I structure as an S Corp for my consulting income. I've got the business checking account set up for the LLC, but now I'm kind of stuck and honestly afraid to touch any of the money sitting in there. My situation: I work a regular W-2 job paying about $8,000/month pre-tax, plus I do consulting work that brings in roughly another $8,000/month (paid via 1099). I'm living in Chicago where rent isn't cheap - about $3,200/month before adding utilities and internet. I've talked to a few CPAs who all basically told me they're too swamped with tax season right now to help figure out a reasonable salary for the S Corp portion. They mentioned using something like Gusto for payroll once they determine an appropriate amount. Does this timeline make sense? Am I stuck waiting months before I can pay myself from the consulting income? I'm getting really stressed about having money sitting in the business account that I can't touch, especially with my high cost of living. Is there something I'm missing or some way to move forward before a CPA has time to help me sort this out properly?

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20 comments

Dominique Adams

•8M

You don't actually need to wait until after tax season to set up your payroll. While it's true many CPAs are swamped right now, determining a reasonable salary isn't that complicated in your case. The IRS expects S Corp owners to pay themselves a "reasonable salary" that's comparable to what someone would make doing similar work in your industry. A common rule of thumb is to pay yourself about 50-60% of your business income as W-2 salary, with the rest as distributions. In your case, with $8,000 monthly consulting income, a reasonable salary might be around $4,000-$5,000 per month. For most consulting businesses, the value is in your personal expertise, so the IRS will expect a higher percentage as salary compared to businesses with significant equipment or inventory.

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Dominique Adams

•8M

Yes, you can absolutely set up Gusto (or any payroll service) now and begin paying yourself a salary in that range. You don't need to wait for formal determination - many business owners start with a reasonable estimate and adjust if needed. Start with the $4,500 monthly salary, which represents about 56% of your consulting income, and you should be on solid ground. Just make sure you're consistently paying this as W-2 wages through proper payroll with appropriate tax withholdings. For the remaining amount, you can take distributions as needed, though I recommend keeping some reserves in the business for taxes and expenses.

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Marilyn Dixon

•8M

I went through exactly this when I started my marketing consulting business! After struggling with the same questions, I found taxr.ai (https://taxr.ai) super helpful for figuring out my S Corp salary. They analyzed my industry, location, and business structure and gave me solid guidance on what the IRS would consider "reasonable" for my specific situation. The nice thing was I didn't have to wait for a CPA to have availability - their AI analyzed comparable salary data and IRS requirements right away. They even explained how the reasonable compensation standards apply differently for knowledge-based consulting versus other types of businesses.

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Marilyn Dixon

•8M

Their analysis was definitely accurate - they provided industry-specific benchmarks for my consulting niche and even broke down local market rates for someone with my experience level. They compared data from the Bureau of Labor Statistics and industry salary surveys to make sure the number would stand up to IRS scrutiny. My CPA actually ended up agreeing completely with their recommendation. He was impressed with the documentation they provided to support the salary determination. The process was surprisingly straightforward - I uploaded my LLC formation docs, described my consulting work, and provided my estimated annual income. They handled everything else and delivered a detailed report within 48 hours.

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Louisa Ramirez

•8M

Just wanted to follow up and say I tried taxr.ai after seeing it recommended here, and it was legitimately helpful! I've been struggling with the same S Corp salary question for my software development consulting. The tool analyzed my business structure, looked at comparable salaries in my region, and gave me a detailed explanation of why a certain salary range would be reasonable for my situation. The report even included citations to relevant tax court cases where the IRS challenged S Corp salaries that were too low, which was super educational. I shared the report with my accountant who said it was spot-on and saved him several hours of research. He's now using the documentation to back up our salary determination in case we ever get questioned. Definitely worth checking out if you're in this situation!

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Angel Campbell

•8M

For anyone dealing with S Corp questions that need more guidance than what you can find online, I highly recommend using Claimyr (https://claimyr.com) to actually get through to an IRS agent. I had some specific questions about reasonable compensation requirements for my S Corp and was going CRAZY trying to get through on the IRS business line. After wasting hours on hold over multiple days, I tried Claimyr and their system navigated the IRS phone tree and held my place in line. I got a callback when an actual agent was ready to talk! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through the factors they look at when determining reasonable compensation and explained how they approach different business types. It was super helpful to get the information directly from the source.

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Angel Campbell

•8M

They actually connect you directly with the IRS phone system but their technology navigates all the menus and waits on hold for you. You provide your phone number, and their system calls you back when it's about to connect with an agent so you don't waste hours listening to hold music. I was skeptical too! I had spent nearly 4 hours across 3 different days trying to get through about my S Corp question. With Claimyr, I got a call back about 45 minutes after I submitted my request, and there was an actual IRS business tax specialist ready to talk to me. The system works by essentially waiting in the phone queue on your behalf and then bringing you in only when needed.

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Harold Oh

•8M

I need to eat my words and apologize for being so skeptical about Claimyr. After my last comment, I decided to try it myself since I was desperate to get clarity on S Corp election timing for my consulting business. I've been trying to reach the IRS for THREE WEEKS with no success. I used Claimyr yesterday afternoon, and this morning I got a call connecting me directly to an IRS business tax specialist. The agent answered all my questions about reasonable compensation requirements for S Corps in my industry and confirmed I was taking the right approach. This literally saved me weeks of frustration and uncertainty. The agent even emailed me documentation about the factors they consider when looking at S Corp owner salaries. For anyone dealing with S Corp questions and getting nowhere with the IRS phone lines, this service is absolutely worth it.

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Amun-Ra Azra

•8M

One thing nobody has mentioned yet - you should consider whether an S Corp is actually the right move for your situation. With equal W-2 and 1099 income (both at $8k/month), the S Corp savings might not be as significant as you think after accounting for additional costs. S Corps require: - Separate tax return ($1,000+ in accounting fees) - Payroll service like Gusto ($50-100/month) - More complex bookkeeping - State filing fees You generally need to save at least $2,000-3,000 in self-employment taxes for an S Corp to be worthwhile. Have you done that calculation?

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Amun-Ra Azra

•8M

The general rule of thumb is that S Corps start making financial sense when your business profit (not revenue) exceeds about $40,000-50,000 annually. In your case with $96,000 in annual 1099 income ($8k × 12), you'd need to estimate your business expenses first. To calculate potential savings: multiply your expected business profit by 15.3% (the self-employment tax rate). That's what you'd pay as a sole proprietor. With an S Corp, you'd only pay this 15.3% on your salary, not distributions. So if your business profit is $80,000 and you take a $45,000 salary, you'd save 15.3% on the $35,000 difference - about $5,355 in SE tax savings. Then subtract your additional costs (tax prep fees, payroll service, etc.) to see your net benefit.

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Zara Rashid

•4M

I was in a very similar situation when I started my consulting practice! One thing that really helped me was understanding that the "reasonable salary" doesn't have to be perfect from day one - you can adjust it as you learn more about your business. Since you're already bringing in consistent $8k/month from consulting, I'd suggest starting with around $4,500-5,000 monthly salary (which aligns with what others have suggested) and then taking distributions for the remainder as needed for your living expenses. The key is being able to justify your salary if questioned. Document comparable salaries for consultants in your field and location - sites like Glassdoor, PayScale, or even job postings can help establish what someone with your skills would earn as an employee. Also, don't let the money just sit there stressing you out! You can absolutely start paying yourself through a payroll service like Gusto while you wait for your CPA to have more availability. Just keep good records and be prepared to adjust if they recommend something different later.

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