Summary of What This Blog Covers:
- Learn the Smart Way to Pay Yourself as a Business Owner
Understand the difference between salary and distributions, how your business structure impacts what’s allowed, and why paying yourself isn’t just about money. It’s about building a strategic, IRS-compliant plan. - Avoid Costly Tax Mistakes by Following the S-Corp Playbook
Discover how combining a reasonable W-2 salary with tax-free distributions in an S-Corporation can save you thousands in self-employment taxes when done right with the help of a licensed CPA. - Understand “Reasonable Compensation” and Why the IRS Cares
Get clarity on how the IRS defines fair salary for S-Corp owners, and why failing to pay yourself properly can lead to audits, penalties, and reclassified income. Learn how to document your compensation the right way. - Use Compensation to Power Your Financial Future
See how your salary and payroll choices impact retirement savings, loan eligibility, insurance deductions, and exit planning, and how Insogna CPA helps you align tax strategy with long-term wealth goals.
So, you’ve built your business.
You’re signing clients. Bringing in revenue. Maybe even hiring a small team.
And now it’s time for the million-dollar question (or at least, the high five-figure one):
How do you actually pay yourself and do it right?
Because let’s be honest. If you wanted to run a business just to give more money to the IRS…
Well, you wouldn’t be reading this, would you?
Whether you’re an LLC, S-Corp, or sole proprietor, paying yourself isn’t just about cutting a check, it’s about strategy. It’s about building wealth, not just income. And it’s about doing it in a way that’s legal, smart, and completely IRS-compliant.
At Insogna CPA, a top-rated CPA firm in Austin, Texas, we help business owners like you set up bulletproof compensation plans so you can build confidently, save strategically, and sleep like a baby during tax season.
Let’s get into it.
Why Paying Yourself Right Matters More Than You Think
You didn’t build a business just to keep spinning your wheels. You built it to create financial freedom, right?
Well, the way you pay yourself directly affects:
- How much tax you owe (or don’t owe)
- Your eligibility for loans, mortgages, and credit
- How much you can save for retirement
- Your future Social Security income
- Whether your business passes IRS scrutiny (yes, they are looking)
Too many business owners wing this part and end up with surprise tax bills, audit letters, or missed financial opportunities.
Let’s break it all down.
Option 1: Paying Yourself a Salary (W-2)
If you’ve formed an S Corporation or C Corporation, and you’re actively working in your business, congratulations. You’ve got to treat yourself like an employee.
This means you:
- Enroll in payroll
- Withhold and pay payroll taxes (Social Security and Medicare)
- Issue yourself a W-2 at year-end
- Get taxed as an employee (but with some very real upsides)
Why salaries are strategic:
- They create consistency, ideal if you’re applying for a mortgage or car loan
- You contribute to Social Security and Medicare, building future benefits
- You can qualify for retirement plans like Solo 401(k)s, SEP IRAs, or even health reimbursement accounts
But here’s the key: you don’t just pick a salary out of thin air. You have to pay yourself reasonable compensation. Something the IRS defines as “what someone else would be paid to do the work you do.”
More on that later.
Option 2: Taking Distributions (a.k.a. Profit Withdrawals)
If you’re a sole proprietor, LLC, or own an S-Corp, you can also take money out of your business as a distribution.
These are not subject to payroll taxes, which can save you serious money.
- Flexible
- Simple to take (especially if you’re the only owner)
- Ideal for pulling profits without triggering additional tax liabilities
But: If you’re running an S-Corp, you can’t only take distributions.
You must pay yourself a reasonable salary first.
Distributions come after that.
The S-Corp Strategy: The Sweet Spot Between Salary and Distribution
This is where the real tax magic happens.
If you’re structured as an S Corporation, you get the best of both worlds:
- Pay yourself a fair salary (on payroll, taxed normally)
- Take the remaining profit as a distribution (not subject to payroll tax)
Here’s what that looks like:
Let’s say your S-Corp brings in $200,000 in net profit.
You pay yourself an $80,000 salary because that’s reasonable for your role.
The remaining $120,000? You take as a distribution.
That $120,000 avoids Social Security and Medicare tax (roughly 15.3%).
That’s an $18,360 tax savings just for structuring your compensation properly.
This is why working with a certified public accountant near you especially one who knows S-Corp tax law inside and out, isn’t optional. It’s strategic.
What Is “Reasonable Compensation,” Exactly?
Great question. And one we get all the time as a small business CPA in Austin.
Here’s the IRS’s rule:
If you’re working in your business, you must pay yourself a salary that reflects what someone else would earn for doing the same job.
No lowballing. No skipping. And definitely no treating yourself to six-figure distributions while claiming a $10,000 salary.
They look at:
- Your job duties
- Your experience and training
- Hours worked
- Industry and location
- Comparable salaries in similar businesses
At Insogna CPA, we use verified compensation data, IRS benchmarking tools, and salary analysis software to determine your salary. Then we document it so if the IRS ever asks, you’ve got the receipts.
The Most Common Mistakes (and How to Avoid Them)
Let’s be real, plenty of business owners mess this up. Not because they’re shady, but because they didn’t know better.
Here’s what we see most often:
1. Not Paying a Salary at All
Taking only distributions is a red flag for the IRS. If you’re working in the business, they expect to see payroll.
2. Picking an Arbitrary Salary
“$40K sounds fair, right?” Not good enough. You need to back your salary with data and industry standards.
3. Failing to Adjust Salary Over Time
If your business has grown, your salary probably should too. What was “reasonable” at $100K in revenue isn’t the same at $500K.
4. Not Tracking Owner’s Draws or Distributions
Commingling personal and business finances without documentation? That’s audit bait.
This is why working with a licensed CPA like our team at Insogna CPA keeps your finances clean, strategic, and audit-ready.
How Payroll Impacts the Rest of Your Financial Life
Still think how you pay yourself is “just about taxes?” Think again.
Your salary and compensation also affect:
- Your ability to contribute to retirement plans (especially high-contribution options like Solo 401(k)s or defined benefit plans)
- Your Social Security income in retirement
- Your eligibility for personal financing (mortgages, business loans, etc.)
- Your ability to deduct benefits like health insurance through your business
- Your succession and exit planning—how you eventually sell or transition the business
We help clients use their payroll and compensation as a tool not just to stay compliant, but to build generational wealth and long-term financial independence.
That’s the difference between a tax preparer near you and a tax advisor in Austin who actually sees the big picture.
What About Foreign Accounts and FBAR?
Have overseas investments? International accounts?
If you’re paying yourself and you have foreign financial interests, your salary and structure could affect your FBAR filing and foreign income reporting.
Don’t take chances here. The penalties for failing to file FBAR (Report of Foreign Bank and Financial Accounts) can be massive even if you didn’t mean to mess up.
Our enrolled agents and international tax professionals can help you stay compliant across borders.
Why Insogna CPA?
Here’s what makes us different from your average tax accountant near you or accounting firm in Austin:
We’re not just number-crunchers.
We’re problem-solvers, strategists, and partners in your success.
When you work with Insogna CPA, you get:
- A team of certified CPAs and chartered professional accountants who understand small business inside and out
- Custom payroll planning that saves you money and keeps you compliant
- Tax strategies tailored to your structure, industry, and goals
- Annual compensation reviews as your business grows
- Real-time support all year not just during tax season
Whether you’re a solopreneur scaling your first S-Corp or a growing agency managing multiple owners, we make sure your compensation plan is clean, smart, and future-proof.
Take the Next Step: Pay Yourself the Smart Way
If you’re paying yourself without a clear plan, you’re probably leaving money on the table or worse, setting yourself up for a tax surprise.
But the good news? You don’t have to figure this out alone.
Contact Insogna CPA today to schedule a strategic consultation.
We’ll help you set the right salary, structure your distributions, reduce taxes legally, and build a smarter compensation plan for the future.
Because you didn’t build this business to just get by, you built it to thrive.
And we’re here to make sure you do.