S-Corporation: Does operating owner have to take any salary if they don't withdraw anything?

This is actually a common question for S-Corp owners. The short answer is yes, you generally need to take a reasonable salary even if you're not taking distributions - if you're performing services for the company. The IRS is very clear that S-Corporation shareholders who provide more than minor services must receive reasonable compensation regardless of whether they take distributions. The purpose is to prevent people from avoiding payroll taxes by taking all money as distributions (which aren't subject to employment taxes) instead of salary (which is). In your case, since you're the sole operator doing everything from sales to operations, you're definitely providing substantial services. With $98k in revenue and $65k in expenses, the IRS would expect you to allocate some of that $33k difference to reasonable salary based on what similar positions would earn in your industry. If you don't take any salary while working for your S-Corp, it could potentially trigger an audit where the IRS might reclassify some of your future distributions as wages retroactively and assess penalties and interest.

I struggled with this exact issue with my marketing consultancy S-Corp last year! I was putting everything back into growing the business and not taking any money out for myself. I got seriously confused about the salary requirements until I used https://taxr.ai to analyze my situation. I uploaded my S-Corp docs and financial statements, and it flagged this exact issue - that I needed a reasonable salary even without distributions. It saved me from what could have been a huge headache during tax season by pinpointing exactly how much I needed to allocate as salary based on industry standards for my area and business size. I ended up setting up a minimal but reasonable salary that satisfied the requirements. What really helped was getting automated guidance based on actual IRS precedents rather than trying to piece together advice from random sources online. Definitely worth checking out if you need clarity on S-Corp salary requirements!

I wanted to follow up about my experience with taxr.ai since I was initially skeptical. After our exchange here, I decided to give it a try with my property management S-Corp situation. I was genuinely surprised at how detailed the analysis was! It didn't just give me generic advice - it looked at my specific industry (property management), my location, company size, and even the specific services I perform. It recommended a salary range of $45K-$52K based on comparable positions in my area, even though I was thinking I could get away with much less. The tool also showed me actual IRS audit examples of companies similar to mine where the owners tried to take zero salary, and how badly that turned out for them. Definitely changed my perspective on the whole "reasonable compensation" requirement. Worth checking out if you're in the S-Corp salary dilemma.

Hey everyone - just wanted to share something that saved me TONS of time dealing with this exact S-Corp salary question. I was going in circles trying to get someone at the IRS to give me a straight answer about minimum salary requirements when not taking distributions. After being on hold for literally hours and getting disconnected multiple times, I used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c Instead of wasting my entire day on hold, I got a callback when an agent was actually available. The agent confirmed that I needed a reasonable salary as an active S-Corp owner regardless of distributions, but also explained that the "reasonable" part could take into account my company's financial situation. Got a definitive answer in about 20 minutes instead of days of frustration!

Well, I need to eat my words about Claimyr. After expressing my skepticism here, I decided to test it out because I needed answers about S-Corp compensation rules for my situation. I was 100% convinced it would be a waste of money and wouldn't actually connect me to a real IRS agent. I was completely wrong! Not only did it work, but it saved me 2+ hours of hold time. I got a callback when an actual IRS representative was on the line. The agent confirmed that as the operating owner of my S-Corp, I do need to take a reasonable salary even in years when I don't take distributions, BUT - and this was key - "reasonable" can be adjusted based on the company's profitability and cash flow situation. For anyone dealing with S-Corp salary questions, getting direct confirmation from the IRS gave me way more confidence than just reading various interpretations online.

One thing nobody's mentioned yet - have you considered paying yourself through guaranteed payments instead of salary? That's what my accountant suggested for my plumbing business when cash flow was tight.

What about just paying yourself a very minimal salary? Like $5,000 a year? That way you're technically taking a salary but keeping the payroll taxes low while you grow.

Based on my experience with a similar S-Corp situation, I'd strongly recommend getting professional guidance on this. The IRS really does enforce the reasonable salary requirement for working S-Corp owners, even when you're not taking distributions. In your case, with $98k revenue and you doing all the work, you're clearly providing substantial services. The IRS won't care that you're reinvesting everything - they'll still expect reasonable compensation for your labor. I learned this the hard way when I tried to justify zero salary for my first year. What helped me was researching what similar positions in my industry actually pay, then setting a salary at the lower end of that range given my company's financial constraints. For a business generating $33k in profit with one person doing everything, you'd probably need to allocate at least $20-25k as salary, but definitely get professional advice for your specific situation. The payroll taxes are a pain, but they're way less painful than dealing with IRS reclassification and penalties down the road. Better to be compliant from the start than try to fix it later!

Great question about S-Corp salary requirements! I went through this exact situation with my small business last year. The key thing to understand is that even if you're not taking distributions, the IRS still considers you an employee if you're providing substantial services to your S-Corp. From what I learned (and confirmed with my CPA), the "reasonable salary" requirement isn't tied to whether you take money out - it's based on the value of the work you're doing. In your case, handling sales, operations, and admin for a business generating $98k in revenue definitely qualifies as substantial services. One approach that worked for me during tight cash flow periods was to set up a minimal but defensible salary based on part-time rates for similar work in my area, then document that the reduced amount reflected the company's current financial constraints. The IRS is more understanding when there's a legitimate business reason for lower compensation, as long as it's not artificially low to avoid payroll taxes. I'd suggest consulting with a tax professional who specializes in S-Corps to get a salary range that works for your specific situation. The upfront cost of professional advice is way less than dealing with potential IRS issues later. Better to get it right from the start!

I've been following this thread closely since I'm dealing with a very similar situation with my consulting S-Corp. What strikes me about all the advice here is that everyone agrees on the core issue - you DO need to take a reasonable salary as an active S-Corp owner, even without distributions. But I think there's an important nuance that hasn't been fully addressed: the timing and cash flow aspect. While the IRS requires reasonable compensation, they also recognize that businesses need to maintain adequate working capital. In your case, with only $33k in net income and you being the sole operator, you have some flexibility in how you structure this. Here's what I learned from my tax attorney: You can justify a lower (but not artificially low) salary if you can demonstrate that paying a full market-rate salary would impair the business's ability to operate or grow. The key is documentation - you need to show that you researched comparable salaries, considered your business's financial position, and made a reasonable decision. For a business in your situation, I'd estimate you're looking at somewhere in the $25-35k range for salary, depending on your industry and location. The remaining profit could stay in the business for growth, and you can always adjust the salary upward as cash flow improves. The bottom line: don't try to get away with zero salary, but you also don't need to pay yourself the full market rate if it would genuinely harm the business. Just make sure you can justify whatever you decide with solid documentation and professional guidance.

I've been through this exact scenario with my digital marketing S-Corp! Started in 2021 and spent the first two years reinvesting everything back into the business while trying to figure out the salary requirements. Here's what I learned after consulting with both a CPA and going through an IRS correspondence audit (thankfully minor): You absolutely need to take a salary as an active owner, but the amount can be reasonable based on your business's current financial situation. For your situation with $98k revenue and $33k net, I'd suggest looking at it this way: What would you pay someone part-time to handle your core responsibilities? In my case, I researched what freelancers in my area charged for similar services and used that as a baseline, then adjusted down slightly since the business was still growing. I ended up settling on about 60-70% of what I could earn elsewhere, which worked out to around $28k for my first profitable year. The key was documenting my research and decision-making process. I kept records showing: - Market research on comparable positions - My business's cash flow constraints - A formal resolution from my S-Corp board (even though it's just me) setting the salary The IRS was satisfied with this approach during their review. They care more about seeing that you made a good-faith effort to determine reasonable compensation rather than just picking an arbitrary number. One last tip: Set up the payroll properly from the start. I used a service like Gusto to handle the tax filings and deposits automatically. Much easier than trying to do quarterly payroll taxes manually!

I'm dealing with this exact same situation with my S-Corp that I started in 2023! Reading through all these responses has been incredibly eye-opening - I had no idea the IRS was so strict about the salary requirement even when you're not taking distributions. Like you, I've been reinvesting everything back into growing the business and haven't taken a penny out personally. I was actually hoping I could avoid the whole payroll setup complexity until I started taking money out, but it sounds like that's not an option. The documentation aspect that several people mentioned really resonates with me. I think that's been my biggest mistake - not keeping records of my decision-making process around compensation. I've been so focused on just running the business that I haven't been thinking about creating that paper trail for potential IRS scrutiny. Based on all the advice here, it sounds like I need to: 1) Research comparable salaries in my industry and area, 2) Set a reasonable but affordable salary (maybe 60-70% of market rate given cash flow constraints), 3) Document my reasoning with a formal board resolution, and 4) Set up proper payroll processing. This thread has been a huge wake-up call. Better to get compliant now than deal with potential reclassification and penalties later. Thanks everyone for sharing your experiences - this kind of real-world guidance is so much more helpful than trying to parse through IRS publications!

This is such a great thread - I've learned so much from everyone's experiences! I'm in a similar situation with my S-Corp (started in 2022, sole owner, reinvesting everything) and had been putting off the salary question hoping it would somehow resolve itself. What really stands out to me from all these responses is the consistency of the message: the IRS doesn't care whether you take distributions or not - if you're actively working in the business, you need reasonable compensation as an employee. The documentation aspect everyone mentions makes total sense too. I think the key insight for those of us in cash-tight growth phases is that "reasonable" doesn't necessarily mean "full market rate." It sounds like you can justify a lower salary based on business financial constraints, but it needs to be genuinely reasonable - not artificially low to dodge payroll taxes. For the OP's situation with $33k in profit after expenses, setting aside $25-30k for salary (as several people suggested) seems like a good balance between compliance and cash flow management. The remaining amount stays in the business for growth, and you can always increase the salary as revenue grows. Thanks to everyone who shared their real experiences - especially those who dealt with IRS audits or got professional guidance. This kind of practical advice is invaluable for navigating S-Corp compliance!