How To Pay Yourself As An S-Corp In 2025

So you're an S Corp owner or considering to make the transition from an LLC to an S Corp. Well, how you pay yourself is absolutely critical. There is so much tax savings to have and I swear there are accountants all over the country that screw this up over and over again. The right strategy can mean the difference in 5, 10 or even $20,000 of extra income in your pocket. I'm going to break it down here now. And information you can rely on. My name is Mark Kohler, a CPA attorney, best selling author and between YouTube, my podcast with 25 years of experience helped thousands of small business owners make the transition to the S Corp and manage it properly, saving them thousands of thousands of dollars. So let's get into it now. The S Corporation can either be directly formed as an inc or you may have converted from an LLC to an S Corp. But I'm assuming you're already there and you know that there's tax savings to be had. But let's put it in a visual representation. I think when you can see it, you can feel it and understand it better. And what I've been using for years is the trifecta. So let's go to the whiteboard with the trifecta down here. At the bottom would be your 1040 tax return. All your money flows downhill into your tax return and you may even have a revocable living trust topic for another day. I'm going to split your life in half and I'm going to put operations over here. And this could be even your day job in a W2 or your side hustle as an LLC. That's fine. Over here we're going to put your assets or your investments and this could be rental property, brokerage accounts, crypto, whatever. And you may even have a 401k IRAS, HSAS Roth. Okay, another topic for another day and your home is over here on the side. These assets we're not going to worry about right now. We want to focus here on operations. So what happens with a typical LLC is you're going to pay self employment tax and It's a nightmare. 15.3% on all of your profit. Remember, an LLC does not save taxes. Great for structure, legitimacy, getting the ein, the bank account, learning about business, getting your bookkeeping going, making some money. But then you pay the dreaded self employment tax. That's where the S Corp comes in. Now before I show how you're going to pay yourself and how much, that's the real issue, I want to just talk conceptually here for a Minute an S corporation, like an llc, and some of you may have come from the LLC video and you're graduated and you're over here. You should have a bank account for this entity. It should have its own tax ID number, a corporate book. You should have your annual board meetings. You should be treating this like a real business, because it is. And that's what's going to save you taxes and give you asset protection and protect you in an audit if the IRS comes knocking. So we want to be doing those little things. And I know many of you are not perfect at it, and that's okay. But we can always get better. And our law firm and our Main Street Business services company, we've been helping clients for years do those things to keep their company legitimate. So let's assume you're there. Money's coming in, you're paying for expenses. You've got a debit card or credit card dedicated to that business, and you're really humming along because once you're making 50 to $60,000 or more a year, you better darn well be an S corporation. Now, a second point. I want to answer how you pay yourself anytime you freaking want. Take money out of your S corp, out of your llc, just like you have for years, weeks, months. Just take money whenever you want. It's called a draw. The trick is how you allocate it on paper, how it's going to show up on your tax return, and you're going to issue yourself a W2 paycheck. Well, I should say a W2 report, because you're not going to get a real paycheck. And I don't want you to give yourself a real paycheck. Just take a draw whenever the hell you want. And then we're going to call a piece of it a W2 and call it payroll. That's where we're going to see some tax savings. Now, let's compare the two on the whiteboard because this is going to help you understand again how and how much to pay yourself. So let's say this is your LLC or just a plain old sole proprietorship, and this is your S corporation. We're not going to worry about the C Corp. They're a nightmare for small business owners. I hope none of you are in an S Corp. We'll do a consult with you and help you get out of that if necessary. Now, the llc, S Corp. Let's compare apples to apples. So let's say you're making 100 grand here, 100 grand here. You're spending 20,000 in expenses here, 20,000 in expenses here. And again, that could be cell phone, dining, travel, home electronics, kids, who knows what. And you're going to net 80 grand. Okay, so apples to apples, it's the same bank account, same ein, yada yada. Well, over here you're going to pay 15.3% in self employment tax. That's going to be close to 12 grand. Then you're going to pay state tax. If you're in one of the 41 states that have state tax plus federal. Ouch. Boom, boom, boom. That's why the LLC sucks, because it doesn't save you taxes. So over here on the S Corp, when you make this 80, what we're going to do is split that income into two different pieces. What we want to do is see that go partly as payroll and partly as K1 or pass through. This is the real trick. Now for you accountants listening, you know what reasonable comp is and you're about to freak out because you're like, oh, here it comes. Mark Kohler's going to be too aggressive here. Let me just tell you. I have helped thousands and thousands of clients nail their reasonable comp. I've come up with a matrix to help clients find that right dollar amount. I read every case on reasonable comp. I teach CE on reasonable comp. I interview IRS agents on my podcast over and over again on reasonable comp. And I've never had a client audited in 25 years on reasonable comp. But again, some accountant is going to tell you people that, oh, the IRS is auditing S corps now. Watch out, because they're afraid of their own shadow or they don't want to admit they lost you money in the prior years because they didn't make the S election. So if your account is telling you no or freaking you out, get a second opinion or come to one of my Main street tax pros, the Speak Smart Kohler, and knows the real rules here and isn't again, afraid of their own shadow. This is your tax return. It's your risk, not theirs. You are the captain of the ship. Take control and decide what you want on your tax return. Which brings us to the payroll because, you know, you can tell this is controversial. That's why I'm bringing this up. I don't know why it's controversial, frankly, after I just told you all my track record and thousands of my clients and thousands of advisors that we've been training. But anyway, I get excited because I love this topic and I'm passionate. So what you do in this example with your S corp back to the whiteboard is we're going to take just in this example, and I think this is very, very reasonable, in fact, probably conservative. I'm going to take 50% in payroll and 50% in K1. Now you've already paid yourself. Like I said earlier on, you're going to take a draw whenever you want. But on paper, we're going to allocate 50% to payroll. So in this example, it'd be 40 grand. We're going to put 40 grand to payroll and then 40 grand to draws. On paper, you've already taken the 80 grand. I do not care. But we're going to do quarterly payroll reports where you're going to send in this form 941 and you're going to claim ten grand of payroll. Ten grand of payroll. Ten grand of Payroll. Ten grand of Payroll. And then at the end you're going to get a W2 for 40 grand. Did you ever get a paycheck? No. And so you need to have a payroll service company that understands what's called after the fact payroll. But all of our payroll companies do at Main street is call our business owners at the end of each quarter and say, hey, how much money did you take? Oh, I took eight grand. Okay, cool. Let's call half of that payroll. All right. And they do a report and you send in a deposit to the irs. And why you're sending in that deposit is because of this. This 50 grand. This is the secret. No FICA, no self employment tax, no Obamacare on all of this pass through, none of that. So Instead of paying $12,000, you only pay six, you just cut it in half. We just saved six grand by converting to an S corp. That's it. And I know it's totally expensive to convert to an S Corp. We charge $250 super easy. Now an S Corp tax return will probably cost you about 1,000 or more. And you got to do payroll reports throughout the year, plan them 500 bucks there. So the S corp could easily cost you $1,500 in accounting services throughout the year. But let me get this straight. Now this is hard math. I know. This is super hard math. Save $6,000 if I spend 1,500. I don't know, Mark, it doesn't sound like a good deal. What are you crazy? This is why the S Corps make so much freaking sense. Every dentist, doctor, engineer, accountant, lawyer, realtor, landscaper, restaurant owner, me. We are RLS corporations and this is what we do. Joe Biden had a freaking S corporation for his book deal back in 2016. He had a $12 million book deal and took salary of 800 grand. You saved almost $300,000 or more in FICA. Everybody's doing this. It's okay. So if your accountant is freaking out, you've got the wrong accountant. And if you're listening to this as an accountant and you're like, oh my gosh, Mark, I with you. I believe you. I hear you. Please go do a demo@markjaykohler.com and check out my certification program. I'll bring you clients. We've got 12 modules and 70 topics. This is just one of them. And you business owners, you can go to that same website, marcjkoler.com go to services and look at the network and you can find thousand plus members that would like to have your business that meet with Mark Kohler and the whole crew every week and are certified all in the same topics. People, I hope you're getting the sense here. This is not that hard, it's not that aggressive, and it's freaking amazing. So let's summarize. I want to make sure you get this one more clean piece of paper. So if you have an S corporation, we're going to put that right in the middle here. Make it simple. So here's my little S corp and let's say you're a realtor and you're bringing in 150 grand. And you're going to spend 50 grand on all sorts of expenses. Marketing, home, office, auto, dining, travel, blah, blah, blah. Right. So 50k in expenses and you net 100. Okay. This situation, I might take 40% in payroll. Oh, so I'm going to do 40 grand in payroll and take 60 grand with no FICA, none of that. Right. I just saved $9,000. See, the more money you make, the more you save. With an S corp, again, you're just taking the money anytime you want. But we're going to do this payroll report quarterly and kick out a W2 at the end of the process. And your accountant will know how to do this. You just need to be engaged in the process and make sure they're not too conservative or too aggressive. So to help you do this, I created a payroll matrix. Now I've got articles on this and more videos on it. You can deep dive on it, but here's what it looks like, general. In this matrix we're going to put down here at this axis, how much money you're making. This is your profit that you're taking out of the business. Here we're going to talk about your payroll percentage. So your payroll percentage might be zero. You take no payroll or you take 100% payroll. Here you might have zero money or you're making 500 grand. What's interesting is you make more money, your payroll actually goes down as a percentage of your profit. So here I might be at about 100 grand, and so I might take 40% in payroll. Now, if I'm at 50 grand, I might take 50% or 60% in payroll. If I'm at 400 grand in profit, I might take 20% in payroll. So you don't freak out. The IRS computer system, you're in a reasonable area here. And accountants, you don't need software to do this. This is it. It's subjective, it's easy, it's simple. You go under the radar. The IRS is not going to chase you down. It's the client that wants to take 10 grand in payroll when they made 300 grand, right? You know they're going to get audited and they do. This is reasonable. It works. Never, ever, ever had a problem with this approach, this matrix. Now, this is a subjective approach to get started, but it's we're right in this realm every time. So in summary, if you're a business owner, I've got all sorts of links down below to get to the network to find an account and get my 30 ultimate guide. I've got other videos, my podcast. I want to help you succeed as a small business owner. And the S Corporation is amazing. It's a wonderful tool to help you do that. Now, if you're an accountant, a bookkeeper, ea, CPA attorney, please go check out the network. This advisory program is affordable. You get to be on my network and get leads all day long. You can learn so many strategies that you can help train your own people with and I'll put them in my program so you can be out there billing and make more money. The path to advisory is real. I want to help you convert your compliance clients to advisory topic for another day. Links down below. See you to demo. No obligation. My enrollment team is amazing. Go check it out. And to all of you, the American dream is real. I love it. I'm a business owner and real estate investor and crypto investor too. I do everything I talk about and I love it and I'm so grateful you watched this video. I please subscribe below. I'm not going anywhere and I'll see you on the backside.