Yes, if you work in the business. The IRS requires an S corporation to pay a shareholder-employee reasonable compensation for the services they provide before the company takes non-wage distributions. That pay goes through payroll, with withholding and payroll tax filings, not as a draw.
What "reasonable" means
There is no single number. The IRS looks at what the business would pay someone else to do your job: your role, your hours, your training, and what comparable businesses pay. A salary of $1 with the rest as distributions is the classic mistake. It is also the first thing an examiner checks.
Why the S-corp election still saves money
Wages are subject to payroll tax. Distributions above reasonable salary are not subject to self-employment tax. That gap is the savings. Once profit passes roughly $50,000–$60,000 a year, the savings often justify the added cost of running payroll. Below that, the extra payroll and filing cost can eat the benefit.
What payroll adds in Washington
Washington has no state income tax, but payroll is not free of state filings. Depending on the owner's role and the company's setup, running payroll can bring in:
- Federal payroll tax deposits and quarterly filings
- Washington unemployment insurance reporting through ESD
- L&I workers' compensation reporting by hours worked
- PFML and WA Cares premiums, which are reported quarterly
Some of these have owner-specific exemptions or opt-in rules. We confirm those case by case instead of assuming.
Run your own numbers first
The LLC vs S-corp calculator shows the estimated savings at your profit level. Bring the result to a conversation and we validate it against your real situation.