What does "reasonable salary" mean for an S-corp owner, and why does it matter?

When you run an S-corp, the IRS requires you to pay yourself a "reasonable salary" through payroll for the work you actually do before taking the rest as distributions. It matters because the salary portion is hit with payroll tax while distributions are not, so paying yourself an artificially low salary to dodge tax is a classic audit trigger. "Reasonable" means roughly what you'd pay someone else to do your job — based on your industry, region, hours, and duties. Many owners target something like 40–60% of profit as salary, but there's no fixed formula; it's facts-and-circumstances. Document your reasoning (job title, comparable wages, time spent). Pay too little and the IRS can reclassify distributions as wages, adding back-taxes and penalties. This is one area where professional guidance genuinely pays for itself.