If you're taking distributions without paying yourself a reasonable W-2 salary, you're on the IRS's audit radar. The IRS requires S-Corp owners who work in their business to pay themselves reasonable compensation through payroll before taking distributions. Taking only distributions while earning business income is a major audit trigger.

This mistake can result in tax penalties of up to 100%, plus negligence penalties when the IRS reclassifies your distributions as wages.

If you over-estimate your reasonable salary, you might end up over-paying in taxes, but if you underestimate, you may find yourself in the IRS's crosshairs for an audit.

Many S-Corp owners use arbitrary rules like the "50/50 split" or pay themselves minimum wage, but these methods may not pass muster with the IRS.

Your salary should be based on what you'd pay someone else to do your job with your qualifications and experience.

As an S-Corp owner, failing to set up an Accountable Plan is a costly mistake.

This plan allows you to reimburse yourself for business expenses and shift the deduction from your personal taxes to your S-Corp.

Without this plan, you're missing out on tax-free reimbursements for home office expenses, business use of your personal vehicle, cell phone, internet, and other mixed-use expenses that become deductible business expenses.

Most S-Corp owners use personal assets for business purposes but fail to properly track and reimburse themselves.

For example, if your monthly cell phone bill is $100 and you use it 70% for business, you can reimburse yourself $70 tax-free each month.

The same applies to your vehicle mileage, home office space, and other mixed-use expenses that you're currently paying for personally instead of through your business.

Missed deadlines can result in significant penalties and interest charges while calculation errors can lead to underpayment or overpayment issues.

Many S-Corp owners handle payroll irregularly or make estimated tax payments incorrectly, resulting in cash flow problems and IRS penalties.

Professional payroll management ensures you're paying the right amount at the right time, avoiding costly mistakes.

Without ongoing tax planning, you're missing opportunities to optimize your salary-to-distribution ratio based on your business's performance.

You're also missing chances to implement tax-saving strategies before year-end and ensure you're taking advantage of all available deductions and credits throughout the year.

Setting your salary too low triggers IRS audits, while setting it too high means overpaying payroll taxes unnecessarily.