Reasonable compensation is whatever a comparable employee would be paid for the work you actually do. Training, duties, time, and what similar businesses pay are the factors. There is no 60% rule and no IRS safe percentage. Use this to see the tax at a salary you can explain.
Salary share = salary ÷ profit. Tax saved = sole-prop tax − S-corp tax at that salary.
There is no IRS percentage for reasonable compensation. The test is the work you do, the time you spend, and what a comparable employee would be paid. Savings are the federal difference at the salary you entered.
| Salary as a share of profit | 50% of profit |
|---|---|
| Employer payroll tax | $4,590.00 |
| Employee payroll tax | $4,590.00 |
| Distribution, after employer tax | $55,410.00 |
| Tax as a sole proprietor | $28,461.78 |
| Tax with this salary | $23,302.16 |
| Federal tax saved | $5,159.62 |
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IRS fact sheet FS-2008-25 says officer pay should be reasonable and that distributions are not a substitute for wages. Courts look at the work performed, the time spent, and comparable pay. A year of large distributions and a token salary is the fact pattern that gets reclassified.
As a sole proprietor the whole profit is on Schedule SE. In an S corp, only the W-2 salary is subject to payroll tax. The employer half is a business expense, so it reduces the profit that passes through. Distributions are not subject to self-employment tax. They are still income.
Both sides use the 2026 standard deduction, brackets, and the simplified 20% QBI deduction. QBI on the S corp side is the pass-through after salary and employer payroll tax, not the salary. The comparison ignores state tax, retirement plans, health insurance, and the reasonable-compensation challenge.
| Share of profit | 50% of profit |
|---|---|
| Federal tax saved | $5,159.62 |
| Share of profit | 0% of profit |
|---|---|
| Federal tax saved, before any reclass | $15,463.38 |
None is published. The IRS standard is reasonable pay for the services, not a fraction of profit. A salary that is only a sliver of a full-time owner's profit is hard to defend. Comparable wages for the role are the evidence that holds up.
The calculator still shows the tax difference, because the arithmetic is real. The note flags it. A zero salary with profit left over is the pattern the IRS reclassifies as wages, which removes the savings after the fact.
The form will compute it, and the distribution goes to zero. Paying yourself more than the business earned is not a tax plan. The pass-through becomes a loss after the employer payroll tax.