The biggest mistake Denver S-Corp owners make is setting their salary wrong. Get it too low and the IRS will reclassify your distributions as wages, hitting you with back taxes, penalties, and interest. Get it too high and you're paying unnecessary employment taxes.
Here's the problem: the IRS doesn't publish a salary chart. They just say your compensation must be "reasonable" according to IRS guidelines on S-Corp compensation. That vague standard leaves Denver business owners guessing.
Reasonable compensation means you must pay yourself what you'd pay someone else to do your job. If you're a Denver contractor running a successful construction business, you can't pay yourself $30,000 when project managers in your market earn $80,000.
The IRS fact sheet on S-Corp wages lists factors they consider: training and experience required for your role, duties and responsibilities you perform, time and effort you devote to the business, dividend history and payments to shareholders, compensation paid to non-shareholder employees for similar services, timing and manner of paying bonuses to key people, and what comparable businesses pay for similar services.
Our Denver business CPA team reviews these factors with every S-Corp client to ensure their salary withstands IRS scrutiny.
Some Denver business owners think they can skip paying themselves a salary if they don't need the cash. Wrong. The IRS is clear: if you're an S-Corp shareholder who performs services for the corporation, you must receive reasonable compensation.
Taking zero salary while pulling distributions is a red flag for audits. The IRS has won numerous court cases on this issue. In David E. Watson P.C. v. United States, the court ruled that an accountant who paid himself zero salary but took $200,000 in distributions owed employment taxes on a reasonable salary amount.
Even if your business had a bad year, you need to pay yourself something if you worked in the business. Drop your salary if profits dropped, but don't go to zero while still taking distributions.
The best way to justify your S-Corp salary is with market data. Look at what people in your role earn in the Denver area. Sites like Salary.com, Glassdoor, and the Bureau of Labor Statistics provide useful benchmarks.
For example, if you're a Denver marketing consultant, search for "Marketing Manager salary Denver Colorado." You'll find that mid-level marketing managers in Denver typically earn $70,000 to $95,000. If your S-Corp made $180,000 in profit, paying yourself $75,000 to $85,000 in salary is defensible.
Document your research. Print the salary surveys. Save the screenshots. If the IRS ever questions your salary, you want evidence that you based it on real market data.
Many CPAs use a rough guideline: your salary should be about one-third to one-half of your S-Corp's profit. This isn't an official IRS rule, but it's a reasonable starting point.
If your Denver business makes $120,000 in profit, a salary of $40,000 to $60,000 is probably in the right ballpark (depending on your industry and role). If your business makes $300,000 in profit, a salary of $100,000 to $150,000 is more appropriate.
This rule breaks down at very high income levels. If your Denver S-Corp makes $800,000 in profit, you don't necessarily need a $400,000 salary. Market data for your role becomes more important than percentage-based rules.
Different industries have different salary norms. Professional services (lawyers, accountants, consultants) typically justify higher salaries because the owner is the primary service provider. Product-based businesses might justify lower salaries because more of the business value comes from inventory, systems, or employees.
A Denver software consultant personally delivering all client work should take a higher salary percentage than a Denver e-commerce business owner who's built systems and hired staff to fulfill orders.
If you run your Denver S-Corp part-time while working another job, you can justify a lower salary. The IRS recognizes that 10 hours per week of work deserves less compensation than 50 hours per week.
Document your time commitment. Keep a log showing hours worked in your S-Corp versus your other job. This supports a lower salary if the IRS ever questions it.
Here's a strategy many Denver S-Corp owners use: set your salary just under the Social Security wage base. For 2025, that's $176,100 according to the IRS.
Why? Because once you're above that amount, the employment tax rate drops from 15.3% to just 2.9% (Medicare only). There's less tax benefit to distributions once you're past the Social Security cap.
If your business makes $250,000 and market rates support it, consider a salary around $160,000 to $175,000. You're maximizing your Social Security credits while still getting some distribution benefits.
The Qualified Business Income deduction creates a tension with S-Corp salary planning. You want a low salary to minimize employment taxes, but you need sufficient W-2 wages to maximize your QBI deduction.
For S-Corp owners, QBI is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. A salary that's too low can reduce or eliminate your QBI deduction.
Our tax strategy services help Denver S-Corp owners model different salary scenarios to find the optimal balance between employment tax savings and QBI deduction maximization.
Your reasonable salary should change as your business changes. If your Denver S-Corp had a great year and profit jumped from $100,000 to $200,000, your salary should increase. If profit dropped from $150,000 to $80,000, your salary should decrease.
This responsiveness to business performance actually supports the "reasonable" standard. Real employees often get raises in good years and face cuts in bad years. Your S-Corp salary should mirror that pattern.
You must pay your S-Corp salary through payroll with proper withholding. You can't just call some of your distributions "salary" at year-end. The IRS requires actual payroll with timely payment of employment taxes.
Most Denver S-Corp owners pay themselves biweekly or monthly through payroll, just like any W-2 employee. Distributions can be taken anytime, as long as you've already met your reasonable salary requirement for the year.
Our Denver bookkeeping services set up proper payroll systems to ensure S-Corp owners stay compliant with IRS timing requirements.
Document your salary decision in writing. Create a simple memo for your corporate records explaining how you determined your salary. Include market salary data for your role and industry in the Denver area. Note any special factors (part-time work, unique skills, business performance). Save this documentation with your tax return preparation files.
If you're ever audited, this memo shows the IRS you made a good-faith effort to set a reasonable salary based on objective factors. Courts give taxpayers more leeway when there's evidence of research and analysis.
The IRS looks for certain patterns that suggest unreasonably low salaries. Taking zero salary while receiving distributions is the biggest red flag. Paying yourself minimum wage while taking $200,000 in distributions is another. Having a salary that's way below what you paid yourself as an employee before converting to S-Corp status raises questions.
The IRS also compares your salary to what you pay non-owner employees. If your Denver office manager earns $65,000 but you pay yourself $40,000 while running the whole business, that doesn't pass the smell test.
Here's our process for helping Denver S-Corp owners set their salary. First, we research market salaries for your role in your industry in the Denver area. Second, we look at your total S-Corp profit and determine an appropriate percentage. Third, we check if the salary provides enough W-2 wages for your QBI deduction. Fourth, we verify the salary produces reasonable employment tax savings to justify S-Corp status. Fifth, we document the rationale in writing.
Most of our Denver clients land on salaries between 35% and 55% of their total S-Corp profit, but it varies significantly based on industry, role, and specific circumstances.
If you're currently running an S-Corp in Denver and you're not confident your salary is set correctly, schedule a consultation with our team. We'll review your current situation, research appropriate market rates, calculate the optimal salary for your specific circumstances, and document the rationale to protect you from IRS challenges.
Getting your S-Corp salary right isn't just about following rules. It's about maximizing tax savings while staying completely compliant. That's the sweet spot where you keep more of your hard-earned profit without losing sleep over potential IRS problems.
