How Much Should I Pay Myself From My S Corp? Not 60% of the Profit.

A one-person e-commerce business clears about $800,000 in a year after everything except the owner's own pay. No employees, no equipment worth depreciating. So he asks the only question that matters before January: how much should I pay myself from my S corp? His bookkeeper says 60% as salary and 40% as distributions, which is what almost every page on the subject says. That is $480,000 of W-2 wages, and of the three numbers he could reasonably have picked, it's the most expensive one.

Nothing in subchapter S, the employment tax regulations, or any revenue ruling sets a percentage. Treas. Reg. §31.3121(d)-1(b) makes a corporate officer an employee unless he performs only minor services and takes no pay for them, and Rev. Rul. 74-44 closed the door on paying zero and calling the rest a distribution, which is the story I told in the S corp Medicare tax loophole. Neither one mentions 60%, or any other fraction of profit. The standard is what someone would have to pay a stranger to do your job, which is a wage question, not a split.

Sean McAlary Ltd. Inc. v. Commissioner, T.C. Summ. Op. 2013-62, shows how the number actually gets built. A real estate broker's S corp reported $231,454 of net income for 2006, paid him no wages at all, and distributed $240,000. The IRS valuation expert took a median wage of $48.44 an hour, multiplied it by 2,080 hours, and called $100,755 reasonable. The court cut the rate to $40 an hour for his limited experience and a hot housing market, landed on $83,200, and left the other $156,800 as distributions. Nobody in that courtroom divided anything by 60. It's a summary opinion, so it sets no precedent, but it is a fair picture of how the analysis actually runs.

Here is the part the rule-of-thumb pages skip. IRC §199A gives pass-through owners a deduction of up to 20% of qualified business income. Your K-1 income is qualified business income. Your W-2 wages are not. Below the 2026 threshold of $403,500 married filing jointly or $201,750 single, set by Rev. Proc. 2025-32, that is the whole story: every dollar you move from the K-1 onto payroll costs 15.3% in payroll tax and shrinks the deduction on the way out. Pay the lowest defensible number and stop reading.

Above the threshold it inverts. Once taxable income clears $553,500 joint or $276,750 single, IRC §199A(b)(2)(B) caps the deduction for a non-service business at the greater of 50% of W-2 wages or 25% of wages plus 2.5% of the unadjusted basis of qualified property. One shareholder-employee, no other payroll, nothing depreciable: that cap is half your own salary. Pay yourself $120,000 on $800,000 of profit and you've capped your deduction at $60,000 when 20% of the K-1 was $134,164. That is $74,164 of deduction given up to avoid $11,026 of payroll tax.

So the pressure runs both directions, and the two forces cross. Each extra dollar of salary costs 12.4% for Social Security up to the 2026 wage base of $184,500 and 2.9% for Medicare with no ceiling, counting both halves, plus 0.9% on wages over $250,000 joint. But while the 50% cap is binding, each extra dollar also lifts the deduction by 50 cents. The crossover is the salary where 50% of wages equals 20% of what's left on the K-1, and for this owner it lands at $224,400.

Read the last row twice. The 60/40 answer is not a cautious middle, it is the worst of the three. By $480,000 the 50% cap had stopped binding a quarter of a million dollars earlier, so the extra $255,600 of salary protected nothing, cost $9,482 more in payroll tax, and cut the QBI deduction from $112,181 to $60,320 by draining the K-1 the deduction is computed on.

IRC §199A(d)(2) carves out health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, and any business whose principal asset is the reputation or skill of its owners or employees. For those owners the deduction is gone entirely above $553,500 joint in 2026, and a higher salary has nothing left to protect. Consultants, advisors, therapists, and agency owners past that ceiling are back to the simple rule: the lowest defensible number. Owners under the threshold get the same answer for the opposite reason, because the W-2 cap does not apply to them at all. The crossover math lives in a narrow band: a non-service business, taxable income above the phase-in range, and little qualified property.

1. 01Get a defensible range before the year starts. Price the roles you actually fill and the hours you actually work against real wage data, write it down, and set the salary in the minutes. A file built in January is worth far more under exam than a better number produced three years later.
2. 02Compute the §199A crossover: the salary at which 50% of W-2 wages equals 20% of the K-1 left after the employer's share of payroll tax. For a non-service business with no other payroll and little qualified property, it tends to land near 28% of profit, which is nowhere close to 60%.
3. 03Pay the crossover if it falls inside the defensible range. If the crossover sits above the range, pay the top of the range and accept the capped deduction. If it sits below, pay the bottom. Never pay a percentage.

The failure I see most often in second-opinion reviews is not the aggressive one. It's the owner who was told 60/40 by whoever sold him the payroll subscription, ran it for four years, and overpaid by five figures a year while never being anywhere near an exam. Two mechanics to know while you fix it: the corporation reports officer pay on Form 1125-E once total receipts reach $500,000, and K-1 income from a business you materially participate in is not net investment income under IRC §1411(c)(2), so the 3.8% tax stays out of this decision. And if your profit is not far past your salary to begin with, the question is smaller than it looks, which is the math in when an S corp is worth it.