Optimize owner pay: balance reasonable salary and distributions

• Corporate officers are generally employees; wages must be “reasonable” for the duties performed. Paying a defensible salary fulfills payroll tax compliance and reduces audit risk, while misclassifying compensation exposes the corporation to withholding and employment tax liabilities and penalties. The IRS emphasizes compensation commensurate with duties for officers performing services Paying yourself | IRS.

• S‑corp earnings flow through to shareholders; owners report their pro rata share of income, loss, deductions, and credits on their personal returns. The character of items is preserved as if realized directly from the source by the corporation, and losses are subject to shareholder‑level basis and debt limitations IRC § 1366.

• Special family rules may apply. If family members render services or furnish capital without reasonable compensation, the IRS may adjust corporate and owner items to reflect the value of those services or capital Treas. Reg. § 1.1366-3.

Practical approach

• Pay a salary supported by comparable data; take remaining profit as distributions (which aren’t subject to employment taxes). Keep contemporaneous support for the wage level to meet IRS “reasonable compensation” expectations Paying yourself | IRS.

• Monitor stock and debt basis to ensure pass‑through losses are usable and avoid suspended losses IRC § 1366 S corporation stock and debt basis | IRS.

Maximize the § 199A QBI deduction

• Individuals may deduct up to 20% of qualified business income (QBI) from S‑corp pass‑through earnings, subject to taxable income thresholds and limits. When taxable income is below the threshold, a simplified computation generally applies; above the threshold, limits based on W‑2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property may reduce the deduction 2024 Instructions for Form 8995 2024 Instructions for Form 8995-A.

• Specified service trades or businesses (SSTBs) face additional constraints; at higher incomes, SSTB QBI may be partially or fully excluded. Aggregation may allow combining non‑SSTB trades for QBI-limit computations if common ownership and operational interdependence criteria are met 2024 Instructions for Form 8995-A.

Advanced tactics

• Model taxable income against thresholds to preserve QBI eligibility or avoid phase‑outs. If above thresholds, plan W‑2 wages and qualified property (UBIA) levels to improve the QBI limit computation 2024 Instructions for Form 8995-A.

• Use permitted aggregation to maximize wage/property limits across trades, ensuring none are SSTBs and aggregation criteria are satisfied 2024 Instructions for Form 8995-A.

• Track suspended losses or deductions carefully; only amounts included in taxable income contribute to QBI, and suspended items retain their qualified/non‑qualified character until allowed 2024 Instructions for Form 8995.

Plan W‑2 wages and qualified property for QBI limits

• At higher incomes, QBI for each trade can be limited to the lesser of 20% of QBI or the greater of 50% of W‑2 wages, or 25% of W‑2 wages plus 2.5% of UBIA of qualified property. Proactively managing wages and capital investments can increase the QBI cap at elevated income levels 2024 Instructions for Form 8995-A.

• If you aggregate trades under the QBI rules, combine QBI, W‑2 wages, and UBIA across the aggregated businesses for limit testing, and disclose aggregations consistently year to year 2024 Instructions for Form 8995-A.

Use compliant benefits and reimbursements

• Operate reimbursements and benefits in a manner consistent with IRS rules to avoid wage recharacterization and unnecessary payroll taxes; ensure proper substantiation and treatment of benefits, and withhold when needed S corporations | IRS 2024 Instructions for Form 1120-S.

California‑specific opportunities and constraints

• California S‑corp taxes. California imposes a 1.5% tax on S‑corp net income and requires payment of the $800 minimum franchise tax (waived for the first taxable year for newly formed or qualified S‑corps). These entity‑level costs should be considered when planning compensation and distributions S corporations | FTB.ca.gov FTB Publication 1060.

• California PTE elective tax credit (currently operative through 2025 filing years). Qualified entities (partnerships/S‑corps) can elect an entity‑level tax and pass a credit to consenting owners equal to 9.3% of qualified net income subject to the election. The election must be made on an original timely return; prepayment rules apply; and credit ordering/interactions should be planned in advance California Forms & Instructions 565 — PTE elective tax section.

• California filing timelines and payments. Confirm S‑corp due dates and estimated payments, including franchise tax and first‑year waivers when applicable Due dates: businesses | FTB.ca.gov 2024 Instructions for Form 100‑ES.

Compliance reminders

• Officer compensation: The IRS scrutinizes officer compensation; setting it too low risks reclassification and back taxes, while setting it too high may increase payroll costs and limit QBI. Align wages with duties and document support Paying yourself | IRS.

• Pass‑through reporting: Ensure proper shareholder reporting and basis tracking; apply family rules when services/capital are furnished by family members without reasonable compensation IRC § 1366 Treas. Reg. § 1.1366-3 S corporation stock and debt basis | IRS.

• QBI tracking: Track QBI items, suspended losses, W‑2 wages, and UBIA for accurate § 199A computations; use permitted aggregation and manage SSTB exposure carefully 2024 Instructions for Form 8995 2024 Instructions for Form 8995-A.

• California options: Evaluate PTE elective tax benefits and compliance steps; budget for the 1.5% S‑corp tax and minimum franchise tax; and confirm due dates for filing and estimated payments California Forms & Instructions 565 — PTE elective tax section S corporations | FTB.ca.gov Due dates: businesses | FTB.ca.gov.

By coordinating salary, distributions, QBI planning, benefits, and state elections, S‑corp owners can improve after‑tax results while staying within the guardrails of federal and California rules S corporations | IRS 2024 Instructions for Form 8995 2024 Instructions for Form 8995-A S corporations | FTB.ca.gov FTB Publication 1060.