What you need to know
When you operate as an S Corp, the IRS expects you to pay yourself a reasonable salary, reflective of what someone in your position would earn. However, defining 'reasonable' can be a bit tricky since the IRS doesn't provide explicit guidelines. Instead, they consider each case based on its specific facts and circumstances.
Let's break down this process to make it a bit less daunting and ensure you feel confident in your decision.
Collective's Suggested Salary
At Collective, we take a supportive approach rather than prescribing a specific number. We understand that every business is unique, so we suggest a salary range based on:
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Expected Profit: We look at your expected profit over the next 12 months.
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Industry Standards: We consider what similar positions pay in your area, according to IRS guidance and broader market research.
This approach allows you to weigh your total income against your salary to find a balance that feels right for you and is justifiable under IRS rules.
Guiding Principles in Salary Selection
We recommend researching what similar roles pay based on where you live. It’s also important to consider your total income in comparison to your salary. From there, you can determine the reasonableness of your selection or update it given any new information.
As a small business, it would be understandable that a salary at one company might be too large of an expense for your business to pay. Remember to keep your expected profit in mind when making decisions on your compensation and set a salary that aligns with your comfort level.
At the end of the day, you are the business owner, and the final decision regarding your salary is entirely up to you.
Flexibility & Adjustments
Your chosen salary isn't set in stone. As your business evolves, you may find that you need to adjust your compensation. Whether it’s increasing your salary to match business growth or scaling back during slower periods, remember that flexibility is your ally. It’s perfectly okay to adjust your salary as needed to keep pace with your business’s financial health.
How Collective Helps
Think of us at Collective as your guides, not gatekeepers. We provide a recommended salary range and help you set up your payroll, but the final decision is yours to make. Our role is to empower you with information and support, so you can make the best decisions for your business.
If ever you’re unsure or need a bit more guidance, don’t hesitate to reach out. We’re here not just to answer your questions but to make sure you feel supported every step of the way.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.