Can I Reduce Taxes by Paying Myself a Lower Salary from My S-Corp?

Yes, but the salary must be "reasonable" — the IRS requires S-Corp owner-employees to pay themselves a fair market salary for the work they perform before taking profit distributions. Paying yourself $1 while taking $200,000 in distributions is an audit red flag and the IRS will reclassify the distributions as wages, costing you back taxes, penalties, and interest. A reasonable salary is based on what a similarly qualified employee would earn for the same work in your industry. Factors the IRS considers include hours worked, duties, and comparable pay in your field. Reasonable compensation varies widely by profession — consult a CPA familiar with S-Corp compensation before setting your salary.