Business owners commonly question how to pay or distribute money to themselves for the services they provide to their own businesses. While the IRC permits businesses to deduct “a reasonable allowance for salaries or other compensation,”1 it is not always simple for pass-through entities.
As pass-through entities, S corporations (and partnerships) do not pay tax at the entity level; rather, their taxable income is allocated to their shareholders who are taxed individually. Let’s take a look at some of the issues S corporation owners face when addressing their compensation.