Customers who are taxed as an S-corp entity and pay themselves a salary can use Gusto’s Reasonable Salary Calculator when they set up their Gusto account.
The IRS requires owners of S-corps to pay themselves a reasonable salary for the work performed before taking any distributions.
Gusto’s Reasonable Salary Calculator helps business owners estimate a reasonable salary for themselves (based on IRS guidelines and occupational data from the Bureau of Labor Statistics). You’ll enter a few details about your roles, your expertise, and how you spend your time at work, and we’ll recommend an annual salary amount.
The reasonable salary calculator is available to businesses taxed as S-Corps with only one employee.
When setting up your Gusto account for the first time, in the “Your Compensation” section, look for the message about reasonable salaries and complying with the IRS.
Click Calculate a reasonable salary.
Review your business details—a reasonable salary varies based on factors like revenue, location, type of job, additional tasks, time spent doing each task, and expertise.
Location
Entity type
Industry
Enter your net annual business revenue. This helps determine what your company can afford to pay you while remaining financially stable.
As a reminder: Net annual business revenue = Gross business profit – all expenses (except for salary).
Read the FAQs to learn more about the difference between reasonable salary and distributions—check out our blog for extra details.
Click Continue.
Use the search bar to select your primary role in the business. This is the role central to the service offered by your business. We’ll compare it to average salaries for similar positions in your area.
Example: If you owned a landscaping company, landscaping would be your primary role.
Use the dropdown to select your level of expertise for that role.
Click Continue.
Let us know any additional tasks you do for the company outside of your main role.
Make sure to include all the tasks you do yourself as an owner-only business. This helps calculate a more accurate (and fair) salary for yourself, and may help you save money on taxes with the IRS.
In our landscaper example, you might put “Driver” as a task, as you transport mulch to clients from suppliers.
You can add more than one task, and remove tasks by clicking the X.
Enter your level of expertise for each additional task you add.
Click Continue.
Estimate how much time you spend doing each of these tasks each week. The total allocation of time should add up to 100%.
The hints below the tasks you’ve entered will let you know how much more of your time you have to allocate until you reach 100%.
If you need to add additional tasks to account for 100% of your time, click Back to add them.
When 100% of your time is accounted for, click Calculate salary.
Review the summary of your estimated gross reasonable salary. It’ll include:
The salary amount
A monthly, bi-weekly, and hourly breakdown of the salary
Your business details
Your roles, expertise, and time allocation
To use the recommended salary, click Use this estimate.
We’ll automatically add the low end of the estimated salary into onboarding—adjust if needed.
The reasonable salary calculator is available to businesses taxed as S-Corps with only one employee.
To estimate your reasonable salary after you've run your first payroll in Gusto:
Go to People.
Click the name of the only employee.
Under Information, click Pay.
Next to Compensation, click Edit.
Click the hyperlink in the pop-up titled Reasonable Salary Calculator.
Q: What’s the difference between a reasonable salary and distributions?
A: A reasonable salary is the regular pay you give yourself, and it’s taxed like normal income. Distributions are profits you take out of the business—they’re taxed too, but at a lower rate.
Q: Why do I have to pay myself a reasonable salary?
A: The government wants to make sure S-corp owners don’t pay themselves too little in salary just to save on taxes. Your salary should match what someone doing your job would earn as an employee in your geographic area.
Q: Do I have to pay taxes on distributions?
A: Yes. Distributions are still taxed, just at a lower rate than your regular salary. For S-corporation owners, these distributions are not subject to self-employment taxes (Social Security and Medicare), but are subject to federal and state income tax.
The S-corp setup helps you save money, but it doesn’t mean you skip taxes.
Q: Why was the Reasonable Salary Calculator not available during onboarding?
A: For now, we only show the RSC (Reasonable Salary Calculator) when you choose to pay yourself (and optionally contractors). If you choose to pay other employees, the RSC does not show.