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How to Minimize Payroll Taxes And Keep the IRS Happy
A practical guide to save $15,000+ in taxes, avoid the IRS scrutiny, and build financial stability.
Tim Salikhov, CFA, EA
April 07, 2025
Many business owners don’t think how to pay themselves. It feels secondary to growth, hiring, and managing cash flow.
But how you pay yourself isn’t just an accounting detail. Pay too little, and you’re asking for an audit. Pay too much as salary, and you’ll throw away enough in payroll taxes to buy a new truck.
One decision that can save you $15,000+
If you’re not already taxed as an S Corporation, you should look into it. It’s one of the easiest ways to keep more of what you earn.
As an S Corp, you’re both an owner and an employee. You pay yourself a W-2 salary and take the rest as distributions. Only the salary portion costs you an additional 15.3% in taxes (social security and Medicare).
If you net $200K and take it entirely as salary, you’ll owe $15,000+ in payroll taxes you could have avoided by splitting it – say, $100K salary and $100K distribution.
That’s real money. But structure matters. If you're bringing in partners, raising outside capital, or need strong asset protection, talk to a tax advisor.
Many of you are business owners, so you have probably heard about S Corps and the ability to save on self employment taxes
However, you have only heard half the story
Here's what you need to know about S Corps
— Thomas Kopelman 💵 (@TKopelman)
11:58 AM • Mar 11, 2024
Stop overpaying yourself to look legit
A lot of owners think they need a big salary to qualify for a mortgage or look serious on paper. That’s a myth.
Lenders care about total income—your salary plus your share of the business’s profits. You don’t need a six-figure W-2 to get approved if your business is healthy.
Underpaying isn’t smarter – it’s riskier
Some folks skip paying themselves altogether to save cash or avoid taxes—especially when things are tight or you’re carrying debt.
But if you’re an S Corp, the IRS expects you to take a “reasonable salary.” Skip it, and you could get flagged. They audit salary lines on your return far more often than your profit distributions.
S Corp?
Many people recategorize earnings as corporate draw (vs. W-2) to avoid FICA taxes
This can trigger IRS scrutiny / result in penalties
Most people who do this pay themselves WAY too low in W-2
You ensure you pay yourself a reasonable salary for what you are doing
— Mark Cecchini, CFP® (@markcecchini)
1:06 PM • Nov 3, 2023
How much to pay yourself? Follow the rules
Start with 30–50% of profits before distributions. If you bring home $200K, a $60–100K salary is typically appropriate. Benchmark against market data like Glassdoor or Salary.com for comparable roles. General managers, for example, often earn $60–120K.
Consistency matters more than precision
Don’t jump from $200K one year to $40K the next. This invites scrutiny.
When you bring $20K one month, but only $5K the next, planning gets hard. The solution – set a modest base salary you can sustain through lean months, then reassess quarterly. Tools like Gusto or Rippling make adjustments easy.
Need to preserve cash? – plan ahead
Want to buy a new truck or open a second location?
Planning to expand or invest? Smart. But if you're taxed as an S Corp, saving money inside the business can backfire.
S Corps are pass-through entities. You’ll be taxed on profits whether you distribute them or not. That can mean 30–40% in taxes on idle cash.
To avoid this, buy the equipment you need before the end of your tax year, or consider spinning up a C Corporation. It pays a flat 21% tax and can retain profits indefinitely.
Owner compensation is one of the most overlooked levers in small business finance. If you're unsure how to structure yours, I can help.
Tim Salikhov, EA, CFA