S-corp Tax Savings for Consultant in AZ

Running an S corporation can lower self-employment taxes by splitting pay into W-2 salary and distributions, but the IRS expects that salary to be reasonable for the work performed. This guide gives a practical, planning-first framework for a Consultant in Arizona, plus the official sources your CPA will want to see.

Last reviewed: January 16, 2026.

Key takeaways

• The IRS expects shareholder-employees to take reasonable wages before distributions.
• Reasonable compensation is fact-specific: role, hours, revenue drivers, and comparable market pay matter.

State tax snapshot

• Arizona S corporations file Form 120S, due by the 15th day of the third month after the tax year ends. (https://azdor.gov/forms/corporate-tax-forms/arizona-s-corporation-income-tax-return)
• Arizona allows an S corporation pass-through entity election; the PTE income tax rate is 2.5%. (https://azdor.gov/forms/corporate-income-tax-highlights)

Role & revenue drivers

Consultants are paid for analysis, strategy, and implementation. Revenue drivers include project scope, retainer terms, and how much value the engagement creates.

State + profession context

Arizona consultants often serve a mix of local and out-of-state clients, which can blur the line between delivery work and business development. Compensation should reflect both billable execution and the time you spend scoping, selling, and managing client relationships. If you lead delivery and own client outcomes, your wage rationale should acknowledge that seniority. Use state wage data to set a floor, then layer in your scope, complexity, and leadership responsibility.

Compensation benchmark (SOC)

• SOC code: 13-1111 (Management Analysts).
• BLS OEWS (May 2023 state estimates) median hourly wage in Arizona: $39.86; annual mean wage: $97,980. (https://www.bls.gov/oes/2023/may/oes_az.htm)

Arizona percentile range (OEWS May 2023)

• 10th: $48,880 | 25th: $63,620 | 50th (median): $82,900 | 75th: $120,180 | 90th: $149,480. (https://www.bls.gov/oes/2023/may/oes_az.htm)

What "reasonable compensation" means

Reasonable compensation is the wage you would pay someone else to do your job under similar conditions. The IRS looks at duties, experience, time spent, and what comparable roles earn, not a fixed percentage of profit. Use multiple data points to defend a range, not a single number.

A clean framework

1. Define the role. Capture what you actually do: client load, revenue responsibility, admin oversight, and business development.

2. Benchmark a range. Use BLS occupational wage data plus any industry surveys or local comps your CPA trusts. Focus on state-level data where possible.

3. Model the split. Pay the reasonable wage as W-2 salary; treat the remaining profit as distributions only after the wage is defensible.

4. Document the rationale. Keep your notes, sources, and calculations with the tax file so your CPA can defend the position.

Example scenario

Example: An Arizona consultant who leads client delivery, scopes new work, and manages subcontractors should justify a wage that reflects senior consulting responsibility, not just delivery hours.

Decision checklist

• Did income or services change materially this year?
• Do you have a defensible compensation range for a Consultant in Arizona?
• Is the documentation clear enough to share with your CPA?
• Have you documented how time is split across delivery, management, and growth?

Questions to ask your CPA

• What compensation range is defensible for my role and hours?
• How does the Arizona PTE election change the split decision this year?
• What documentation would you want if the IRS asked for support?

FAQ

Do I need a separate state S election in Arizona? Many states require additional registration or elections beyond the federal S election. Confirm Arizona requirements with your CPA and the Arizona Department of Revenue.

Should I use national or Arizona wage data? State or local data is typically more defensible when available. Use BLS data and any reputable industry surveys your CPA prefers.

What documents should I keep? Time allocation notes, comparable wage sources, and written rationale for the salary range are the most common requests.

Related resources

• S-corp Reasonable Compensation Guide
• Year-End Tax Projection
• Estimated Tax Catch-Up
• Tax Optimization

Related state guides

• S-corp Tax Savings for Chiropractor in AZ
• S-corp Tax Savings for Dentist in AZ
• S-corp Tax Savings for Realtor in AZ
• S-corp Tax Savings for Software Engineer in AZ
• S-corp Strategy Index
• See all pilot S-corp guides

Next step

Use the S-corp Reasonable Compensation Guide to draft your range, then bring it to your CPA for validation.

Compliance note

This guide is for planning and coordination only. It does not provide tax or legal advice. Confirm details with a qualified professional.

Sources

• https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
• https://www.bls.gov/oes/2023/may/oes_az.htm
• https://azdor.gov/forms/corporate-tax-forms/arizona-s-corporation-income-tax-return
• https://azdor.gov/forms/corporate-income-tax-highlights