Salary or Distribution — Which Split Keeps More in Your Pocket?
An S-Corp owner can take profit two ways: as W-2 salary or as a distribution. Salary is subject to FICA payroll tax of about 15.3% combined, but distributions are not — which is exactly why the IRS requires owner-employees to pay themselves a "reasonable salary" before taking the rest as distributions. Set the salary ratio too low and you risk an audit; set it too high and you pay more payroll tax than necessary. Since federal income tax applies to your combined salary and distribution either way, the real lever you're pulling is how much FICA tax you owe — so finding the right balance for your profit level matters.
How It's Calculated
| Step | Item | Detail |
|---|---|---|
| 1 | Salary | Pre-tax profit × salary ratio |
| 2 | FICA tax | Salary × ~15.3% combined payroll tax |
| 3 | Federal income tax | Progressive rate on profit minus deductible employer FICA |
| 4 | Net take-home | Profit − FICA tax − federal income tax |
This calculator uses simplified 2025 single-filer federal brackets and does not include state tax, the Social Security wage base cap, or the qualified business income (QBI) deduction. Your actual optimal split depends on other income, filing status, and IRS reasonable-salary guidance, so confirm with a CPA.
Frequently Asked Questions
It depends on your total profit. Adjust the ratio to compare net take-home at different splits — higher salary means more FICA but a safer audit profile.
Pay yourself what a similar role would earn in the market before taking the rest as distributions. An unreasonably low salary can trigger an audit and back taxes.
No, it's a simplified 2025 bracket estimate that excludes state tax, the QBI deduction, and the Additional Medicare Tax. Consult a CPA for exact numbers.
※ Actual tax liability depends on your full financial picture and current tax law. This is an estimate only.