And you hear lots of rules of thumb (including some at this website).
And then people talk… you know, about what you can really do. (Hey. We’ve all heard the stories…)
Which is why it’s useful and interesting to sift through actual IRS S corporation salary data. So I want to do that here.
A Quick Review of the Basic Rule
Before we start that sifting, though, let’s recognize and restate the basic rule for setting S corporation shareholder-employee salaries.
That basic rule goes like this: You need to set a salary that some other firm would pay someone for doing similar work.
Furthermore, here’s another good idea. It’s always wise and smart to dig up some real salary survey data for your area for jobs like you’re looking at. (We particularly like Bureau of Labor Statistics data which you can get to from here.)
So keep that in mind as you continue reading. And now let’s look at the data.
Average S Corporation Shareholder Salaries
The table that follows shows average revenues, officer compensation deductions and profits for S corporations operating in roughly a couple of dozen industry categories.
The data comes from the 2017 1120S tax returns S corporation owners filed with the Internal Revenue Service in 2018. (Source: SOI Tax Stats – S Corporation Statistics .)
|Industry||Total Revenues||Officer Salaries Deduction||Net Income|
|Average across all industries||1,717,459||62,046||101,572|
|Construction of buildings||2,532,297||48,177||103,805|
|Heavy and civil engineering construction and land subdivision||4,356,906||90,244||236,445|
|Specialty trade contractors||1,663,561||61,646||113,684|
|Wood product manufacturing||5,446,238||84,442||276,882|
|Printing and related support activities||2,152,810||70,624||102,048|
|Plastics and rubber products manufacturing||8,523,764||183,443||616,423|
|Nonmetallic mineral product manufacturing||5,376,438||133,857||335,001|
|Fabricated metal product manufacturing||4,286,152||123,416||302,302|
|Computer and electronic product manufacturing||8,019,443||220,478||667,210|
|Transportation equipment manufacturing||7,913,887||166,198||579,815|
|Furniture and related product manufacturing||4,423,182||94,029||200,941|
|Clothing and clothing accessories stores||1,076,113||33,532||39,713|
|Sporting goods, hobby, book, and music stores||1,322,979||41,916||42,820|
|Telecommunications (including paging, cellular, satellite, cable and Internet service providers)||2,634,395||58,386||150,375|
|Other information services||943,614||52,606||54,258|
|Nondepository credit intermediation||1,924,311||77,150||206,693|
|Securities, commodity contracts, other financial investments, and related activities||1,374,844||139,252||337,154|
|Professional, scientific, and technical services||835,516||71,680||91,286|
|Management of companies (holding companies)||1,041,515||56,498||417,651|
|Food services and drinking places||1,220,746||35,853||52,957|
Understanding the Table’s Salary Data
Let me quickly describe the table’s data so no confusion exists. We can do this by talking about the first row.
Row one in the table reports on the average revenue, officer salary deduction and net profit considering all 4.7 million S corporations.
Make sure you understand those numbers: On average, an S corporation generates roughly $1.7 million of revenue, deducts $62,046 of salaries expense for all its officers, and reports just over $100,000 of net income.
Tip: Remember too to mentally adjust the numbers for inflation that’s occured since 2017.
And then reading down the rows of the able, look at the other averages for the industry categories listed: mining, construction, manufacturing and so on.
You can probably glean some insights from this information. But you’ll want to keep in mind a few facts.
The S Corporation Salaries Number is the Deduction
A first thing to note, for example, the S corporation salaries value the IRS data lets you calculate? The value represents the average deduction.
So, that $62,046 average just referenced? That’s the average deduction for officer compensation. The amount might represent one officer making $62,046. Or two officers making $31,023. Or three officers making–well, I don’t need to go on. You see how this works.
Officers Not Necessarily Shareholder Employees
A quick related note: An officer isn’t necessarily a shareholder.
Now most of the officer compensation deduction probably does go to shareholder-employees. But maybe not all.
In any case, that’s something else to keep in mind.
Means Probably Higher than Medians
One final thing to remember: The table above shows mean averages: mean total revenues, mean officer compensation deductions and mean net profit.
The reality to recognize about mean averages? A mean value probably exceeds by a large amount the median, or midpoint, value.
For example, suppose you or I calculate the mean and the median of the following ten officer compensation deductions:
- Three officers making $20,000 each
- Six officers making $40,000 each
- One officer making $300,000
The median, or midpoint, officer deduction equals $40,000 in this case.
The mean, or average, officer deduction in this case, however, equals $60,000.
I calculated this as ($20,000+$20,000+$20,000+$40,000+$40,000+$40,000+$40,000+$40,000+$40,000+$300,000)/10
You see what happens with the mean average. That big number–the $300,000–pulls up the average.
An Example of How to Use the Salaries Data
Given all of the above, then, how might you use this data?
Well, you can probably use the average officer deduction values as a benchmark for setting S corporation shareholder salaries for average-sized businesses within a category.
As an example, look at the the average S corporation that operates within the “professional, scientific and technical services” category.
On average, firms within that category of S corporations per the table report revenues of just over $800,000. The officer compensation deduction equals about $72,000. And then the business profit roughly equals $92,000.
If you run similar sized professional services firm? One generating similar profits? You’re probably on pretty safe ground paying yourself around $70,000.
Again, remember that $70,000 represents a deduction amount–not a salary amount. Also it’s a mean not a median. Finally, it might represent not just shareholder-employees but non-shareholder officers. So don’t forget that.
Nevertheless, even given these factors, the value probably provides a pretty reasonable benchmark to consider when setting a salary for a firm in the same industry category.
Getting Additional S Corporation Average Salary Data
One final quick comment. In the past, the IRS published statistics that allowed for building a much longer list of average revenues, officer compensation and net profit by industry.
If you’re interested in a longer list, therefore, you may want to make the calculations yourself using some earlier years’ datasets. (We did calculate and show that longer dataset for 2013 at our S corporations Explained website. You may want to peek there.)
Other S Corporation Salary Resources
We provide some basic guidelines here: S Corporation Salary Rules
Firms wrestling with trading off Section 199A deductions with S corporation payroll tax savings may be interested in this discussion: S Corporation Sharehold Salaries adn the Section 199A Deduction
We’ve got some more tips and guidelines here for setting S Corporation Reasonable Compensation
Finally, here’s a quick overview of some rules for Safe Harbor S Corporation Salaries