Finding the perfect split between S-Corp salary and distributions is where Denver business owners save the most money. Too much salary and you're paying unnecessary employment taxes. Too much in distributions and you risk IRS scrutiny and you might hurt your QBI deduction.
After years of providing tax reduction planning for Denver businesses, we've learned there's a mathematical sweet spot that maximizes total tax savings while keeping you completely compliant.
S-Corp shareholders receive money from their business in two ways. First, you take a salary paid through payroll, subject to employment taxes (Social Security and Medicare). The IRS is clear that shareholder-employees must receive reasonable compensation for services performed.
Second, you take distributions of profit. These are not subject to employment taxes. That's the tax savings mechanism: distributions avoid the 15.3% self-employment tax that hits every dollar of LLC income.
The key is finding the optimal point where your salary is high enough to be "reasonable" but low enough to maximize the distribution portion that avoids employment taxes.
Let's say your Denver S-Corp makes $180,000 in profit. As a standard LLC, you'd pay 15.3% in self-employment taxes on the full amount (up to the Social Security wage base of $176,100 for 2025, per the IRS). That's $26,943 in self-employment taxes.
Convert to S-Corp status and split it as $80,000 salary and $100,000 distributions. Now you only pay 15.3% employment taxes on the $80,000 salary portion. That's $12,240 in employment taxes. You just saved $14,703 annually.
That's real money that stays in your pocket instead of going to the IRS. Our Denver business CPA services help clients calculate these exact savings based on their specific numbers.
Here's where it gets tricky: the Qualified Business Income (QBI) deduction lets you deduct up to 20% of your qualified business income from pass-through entities. But the deduction is limited by your W-2 wages and qualified property.
For S-Corp owners, the limitation is the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. Lower your salary too much to save on employment taxes, and you might reduce your QBI deduction.
Using our example: with $180,000 in S-Corp income and an $80,000 salary, your QBI is $100,000 (you don't get QBI on your salary portion). Your base QBI deduction would be $20,000 (20% of $100,000).
But your wage-based limitation is $40,000 (50% of your $80,000 salary). Since $20,000 is less than $40,000, you get the full QBI deduction. No problem.
Now imagine you dropped your salary to $50,000 to save even more on employment taxes. Your wage-based limitation drops to $25,000 (50% of $50,000). You still get your full $26,000 QBI deduction (20% of $130,000), but you're getting closer to the limitation. Drop the salary much lower and you start losing QBI benefits.
Once you earn above $176,100 (the 2025 Social Security wage base), the employment tax rate drops from 15.3% to just 2.9% (Medicare only). This changes your salary-distribution calculation significantly.
If your Denver S-Corp makes $300,000 in profit, you might set your salary at $175,000 and take $125,000 in distributions. You're maximizing your Social Security credits (which boost your future retirement benefits) while still getting distribution tax savings on the amount above the wage base.
The savings on that $125,000 distribution is only 2.9% (not 15.3%), which equals $3,625. That's still worth having, but the benefit is much smaller once you're past the Social Security cap.
Different industries land at different salary-distribution splits. Professional services where the owner is the primary service provider (consultants, lawyers, CPAs) typically use 50-60% salary and 40-50% distributions. Product-based businesses with systems and inventory can often justify 35-45% salary and 55-65% distributions.
A Denver marketing consultant personally delivering all client services might take a $110,000 salary from $200,000 in profit (55% salary, 45% distributions). A Denver e-commerce business owner who's built automated systems might take $70,000 salary from $200,000 in profit (35% salary, 65% distributions).
If your Denver S-Corp has multiple owners, each owner's salary-distribution split can be different based on their role. The CEO actively running operations might take 50% salary. The investor-owner who contributes capital but little time might take 20% salary.
This flexibility lets you optimize each owner's tax situation individually. But document each person's role and time commitment carefully. The IRS will want to see justification for why different shareholders receive different treatment.
Smart Denver S-Corp owners adjust their salary-distribution split based on actual profit. You might start the year planning for $150,000 in profit with a $65,000 salary. But if business booms and you're tracking toward $220,000 in profit, increase your salary mid-year.
This responsive approach shows the IRS you're setting compensation based on actual business performance, not just trying to game the system. Our bookkeeping services track profit monthly so clients can make informed salary adjustments.
Some years your S-Corp might not have cash available for distributions. Maybe you invested heavily in equipment or inventory. Maybe you're building cash reserves for a big project. That's fine. The IRS doesn't require distributions.
You must pay yourself a reasonable salary if you worked in the business. But distributions are optional. Take them when cash flow allows. This flexibility is one reason S-Corps are popular for growing Denver businesses.
The best way to find your sweet spot is to model multiple scenarios. Calculate employment tax savings at different salary levels. Calculate QBI deduction impact at different salary levels. Factor in Colorado's 4.40% state income tax. Add up total tax savings for each scenario.
Here's an example for a Denver business with $200,000 in profit:
Scenario A: $100,000 salary, $100,000 distributions. Employment tax savings of $15,300. Full QBI deduction of $20,000. Total tax benefit of approximately $10,880.
Scenario B: $80,000 salary, $120,000 distributions. Employment tax savings of $18,360. Full QBI deduction of $24,000. Total tax benefit of approximately $13,056.
Scenario C: $60,000 salary, $140,000 distributions. Employment tax savings of $21,420. Reduced QBI deduction of about $22,000 (hitting wage limitation). Total tax benefit of approximately $13,788.
In this example, Scenario C provides maximum tax savings, but you'd need market data showing that $60,000 is a reasonable salary for your role. If you can't justify that lower salary, Scenario B might be the safer choice.
Document your distribution decisions in corporate minutes. Note the date of each distribution, the amount paid to each shareholder, and that the distribution was made from available retained earnings. Keep these minutes with your corporate records.
This documentation proves to the IRS that distributions were legitimate payments to shareholders, not disguised salary trying to avoid employment taxes.
Taking distributions before paying yourself a reasonable salary is a big mistake. The IRS wants to see regular payroll throughout the year, not one paycheck in December. Taking wildly inconsistent distributions (nothing for three years, then $200,000 in one year) raises red flags. Taking distributions when your S-Corp has negative retained earnings violates corporate law in most states.
Here's what most Denver business owners miss: your salary-distribution split should be part of your annual tax planning strategy, not an afterthought. Before year-end, project your total S-Corp income. Model different salary scenarios. Choose the split that maximizes total tax savings while staying defensible.
Our tax strategy services include year-end planning sessions where we run these numbers with Denver clients and optimize their salary-distribution split for the year.
S-Corp owners can deduct health insurance premiums, but there's a process. The S-Corp pays the premiums and includes them in your W-2 wages. Then you deduct them on your personal return. This strategy requires proper coordination between your S-Corp salary and your insurance premiums.
We cover this in detail in our article on S-Corp health insurance strategies, but the short version is: include your annual insurance premiums when calculating your reasonable salary amount.
Every Denver S-Corp owner's optimal split is different. It depends on your total profit, your industry, your role in the business, market salary rates for your position, your state tax situation, whether you're above or below the Social Security wage base, and your QBI deduction status.
The "right" answer requires running actual calculations with your specific numbers. At Succentrix, we help Denver S-Corp owners model multiple scenarios and identify the split that provides maximum tax savings while keeping them completely compliant.
Want to know if you're leaving money on the table with your current salary-distribution split? Schedule a consultation with our Denver team. We'll analyze your current structure, model alternative scenarios, calculate potential additional tax savings, and recommend the optimal split for your situation. Most clients find they can save an additional $2,000 to $8,000 per year just by optimizing this one factor.
