One of the benefits of an S corporation ownership structure is a payroll tax advantage. An S corporation owner will pay payroll tax on his or her salary, but not on the entire amount of corporate profit. For example, if a corporation’s profit would be $500,000 without factoring in the owner’s salary, and the owner takes $200,000 as compensation and shows $300,000 in profit, only the salary amount is subject to payroll tax. This is one of the benefits S corporations have over LLCs, where all company profit is considered self-employment income and subject to payroll tax. (A legislative proposal to change this treatment recently failed to pass.)

This advantage may encourage S corporation owners to take less in salary and more in profit so as to save payroll taxes, but a recent case [David E. Watson, P.C. v US, 107 AFTR 2d ¶2011-305 (S D IA, December 23, 2010)] shows that salary still must be reasonable.