S-Corp Consultant at $250k Revenue: Salary vs Distribution Tradeoff

Sample case: management consultant, S-Corp single owner, $250,000 of net business profit available to split between W-2 salary and distribution, age 42, marginal bracket 32%.

The salary lever

For an S-Corp the employer profit-sharing share is 25% of W-2 wages, and only W-2 wages. Distributions are invisible to the 401(k). So your salary directly sets your retirement ceiling. Pay yourself $80k W-2 and the employer share caps at $20k. Pay yourself $94k and it caps at $23,500, finally enough to hit the soft target where employee + employer reach the $47,000 mark with a full deferral.

Reasonable compensation rule

The IRS makes you pay yourself a "reasonable" salary for the role. For an experienced consultant in a metro market that's usually $120k-$180k. Underpay yourself and audit risk spikes. Overpay yourself and you waste 7.65% in payroll tax that distributions would have avoided.

Sweet spot for max Solo 401(k)

To hit the full $70,000 combined cap on an S-Corp, you need $186,000 of W-2 wages (so 25% × $186k = $46,500 employer share, plus $23,500 deferral = $70,000). For our $250k case, that means $186k salary + $64k distribution. Payroll tax on the salary jump from $120k to $186k is about $1,750 (above the SS wage base, only 2.9% Medicare applies past $168,600). Worth it for $7,500 more retirement room? Almost always yes at 32% bracket.

Catch-up at 42

Not yet, that opens at 50. Plan for it: at 50 the cap moves to $77,500, so you need $216k of W-2 to fully consume the new room.