As we start a new year, it’s the perfect time for S Corporation owners to take a fresh look at their compensation. Whether you’re styling clients behind the chair or managing the day-to-day operations of your business, the IRS requires that S Corporation business owners who actively work in their company pay themselves “reasonable compensation.”
What Is Reasonable Compensation?
Reasonable compensation is the amount you would expect to pay someone else with similar skills and responsibilities to perform the work you do in your salon. For salon owners, this often means balancing two roles:
- Producing income: Providing services directly to clients.
- Management: Scheduling staff, ordering supplies, marketing, bookkeeping, etc.
Both roles matter, and both must be reflected in your compensation.
Why Does It Matter?
- IRS Compliance: Paying yourself too little can raise red flags with the IRS, especially if you’re taking large distributions instead of wages.
- Tax Planning: Properly structured compensation can help minimize payroll taxes while keeping you compliant.
- Business Health: Reviewing compensation ensures your salon’s finances reflect the true cost of labor—including your own.
Factors to Consider
When determining reasonable compensation, ask yourself:
- How much time do I spend behind the chair versus managing the salon?
- What would I pay another stylist for the same services?
- What would I pay a manager to handle the administrative and leadership tasks?
- Am I keeping pace with industry standards in my region?
Next Steps
- Document your role: Track hours spent on client services versus management.
- Benchmark pay: Compare stylist and manager wages in your area.
- Periodic Review: Compensation should be revisited from time to time as your salon grows and evolves and as your role changes.
- Consult with your CPA: The right balance between wages and distributions is important. So is ensuring compliance and optimizing tax outcomes.
Our Final Thought
Your talent and leadership are the backbone of your salon. Paying yourself fairly for both roles isn’t just about
compliance—it’s about recognizing the value you bring every day.