Why Owner Compensation Planning Matters

For S-corp owners, salary is subject to FICA/Medicare (15.3% combined on the first ~$168K, then 2.9% Medicare on everything above). Distributions are not. Where you split matters.

Section 199A's qualified business income deduction depends in part on W-2 wages paid by the business. For some owners and incomes, paying more wages preserves a larger QBI deduction; for others, it reduces it. The interaction has to be modeled.

Solo 401(k) and SEP contribution limits are driven by W-2 wages (S-corp) or net earnings (Schedule C). Setting comp too low can cap how much you can put away pre-tax.

Unreasonably low S-corp salary is a long-standing IRS exam focus. The IRS publishes data on reasonable comp ranges by occupation; outliers attract attention.

Run a comp study at the start of the year. Set salary in writing. Process payroll consistently. Model the impact on QBI and retirement. Revisit annually.