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IRS S Corporation Shareholder Salary Data

IRS S corporation shareholder salary data blog postIf you operate as an S corporation, you already know that you need to set a salary for shareholder-employees. A reasonable one.

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
Mining      1,861,736      54,597       176,957
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
Food manufacturing     13,361,496     161,648       701,717
Wood product manufacturing      5,446,238      84,442       276,882
Paper manufacturing     21,245,809     366,622     1,159,865
Printing and related support activities      2,152,810      70,624       102,048
Chemical manufacturing      9,940,339     325,824       761,048
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
Machinery manufacturing      4,309,651     108,096       349,773
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
Miscellaneous manufacturing      2,966,943      99,933       235,635
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
Nonstore retailers      1,325,915      37,896        63,518
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
Educational services        509,130      32,718        37,677
Accommodation        979,720      27,281        76,953
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

 

 

 

 

 

 

 

 

 

 

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