S-Corps and Salaries: What Atlanta Entrepreneurs Should Know

If you’re running a business in Atlanta and have elected S-Corp status, one of the most important decisions you’ll make is how to pay yourself. Do it right, and you could save thousands in taxes.

Do it wrong, and the IRS could come knocking. This isn’t just about avoiding penalties—though that’s definitely part of it. This is about building a smart, sustainable compensation strategy that fits both your business goals and legal obligations.

Why S-Corp Status Changes How You Pay Yourself

When you elect S-Corp status, your tax situation shifts. Instead of paying self-employment tax on all your business income like a sole proprietor or single-member LLC, you only pay it on the portion you designate as your salary. The rest can be taken as distributions—income that isn’t subject to payroll taxes.

This is one of the main advantages of an S-Corp, but it comes with a major catch: you must pay yourself a reasonable salary. That’s the IRS rule. You can’t just take all your income as distributions and skip payroll taxes.

What does this mean in practice?

• You’ll need to run payroll for yourself (yes, with tax withholdings and W-2s).
• You’ll also need to determine what a reasonable salary looks like for your role in the business.
• You’ll want to keep good documentation to justify your numbers if the IRS ever audits you.

If you underpay yourself in order to avoid payroll taxes, the IRS can reclassify your distributions as wages and hit you with back taxes and penalties.

How to Figure Out a Reasonable Salary

Reasonable is a vague term, and that’s exactly why it causes confusion. The IRS doesn’t give a fixed formula, but they do consider a range of factors when evaluating whether your compensation is appropriate.

Here’s what you should think about:

• What would someone else in your role earn? Look at industry standards for similar roles in the Atlanta market.
• What are your duties? If you’re actively managing the business, leading operations, or generating revenue, your salary should reflect that.
• How profitable is your business? The more your business makes, the harder it is to justify a low salary.
• How much time do you spend working? Full-time involvement suggests a higher wage is appropriate.

Some business owners pay themselves too little to maximize tax savings. Others overcorrect and pay themselves more than their business can support. Your goal is to find a middle ground that reflects your role and responsibilities without hurting your company’s cash flow.

Need a benchmark? Many business owners look at data from the Bureau of Labor Statistics, job boards, or even accountant recommendations for similar roles in their field.

How to Actually Pay Yourself

Once you’ve determined your salary, you’ll need to set up the mechanics of getting paid. That means treating yourself like an employee—even if you’re also the owner.

Here’s what you need in place:

• Run payroll: You’ll need a system that calculates withholdings for federal income tax, Social Security, Medicare, and any Georgia state taxes. Many entrepreneurs use software like Gusto, ADP, or QuickBooks Payroll.
• Issue a W-2: At the end of the year, you’ll need to issue yourself a W-2 form, just like you would for any other employee.
• File payroll taxes: Both quarterly and annual filings are required. You’re responsible for the employer and employee portions of payroll taxes.
• Pay distributions separately: Don’t mix them with payroll. Distributions aren’t subject to payroll taxes, but they still need to be tracked and reported.

This can feel like overkill for a solo business owner, but it’s necessary. The IRS has made clear in audits and tax court rulings that S-Corp owners can’t skip this step. You need a system in place that shows you’re complying with employment tax laws, even if the only person on payroll is you.

Common Mistakes That Can Cost You

Entrepreneurs love to DIY, but with S-Corp payroll, some shortcuts can get you into trouble. Here are a few mistakes we see regularly:

• Not taking a salary at all: This is the biggest red flag. If you’re making money and actively working in the business, the IRS expects to see wages on your tax return.
• Taking inconsistent paychecks: Skipping months or changing amounts frequently without documentation can undermine your claim that your salary is reasonable.
• Misclassifying distributions: If you’re taking large owner draws without issuing a W-2 or filing payroll taxes, you’re setting yourself up for a reclassification—and a tax bill.
• Overpaying yourself in a low-profit year: Some business owners forget to adjust salary down in slow years. If your business can’t support your wage, that’s a problem too.
• Failing to withhold payroll taxes: It’s not enough to transfer yourself money. If you’re not filing the proper returns and sending taxes to the IRS and the Georgia Department of Revenue, you’re out of compliance.

If you’re audited, these issues don’t just result in more taxes. You could also face interest and penalties. For Atlanta business owners, it’s far easier (and cheaper) to get it right the first time.

Why Legal Guidance Matters

Navigating S-Corp salary rules isn’t something you have to do alone. And it’s not just about numbers—it’s about protecting your business from tax issues and keeping things running smoothly.

At MacGregor Lyon, we help Atlanta entrepreneurs structure their businesses in ways that make sense legally, financially, and practically. That includes figuring out how to pay yourself under an S-Corp structure in a way that meets IRS standards and works for your business.

Stay Compliant With the Right Legal Guidance

If you’re unsure whether your salary is reasonable, struggling to set up payroll, or just want to make sure you’re doing it all correctly, reach out right now. We’ll help you make sense of it and avoid mistakes that can hurt your bottom line.