I have a client who owns an S-corp which shares 50% with his partner. They both draw salaries and know that the salaries need to be equal. However, they think it's the NET pay that needs to be equal, not the gross wages. Right now, the gross salaries are off and I want to correct this. I have been searching for information on this so I can set them strait.

Can you tell me which is correct and where I can find this information so I can send it to them?

I guess it depends no clear cut interpretation.The number one audit risk for S-Corps is salary and wages paid to officers of the corporation.basically, the amount of the compensation will never exceed the amount received by the shareholders either directly or indirectly; since the two shareholders/EEs working for their own S-corp really are employees, then it logically follows that employees must be paid some sort of wage. Of course, tax rules are not always logical, but I think this would be a reasonable extension of the IRS's own line of thinking. As an owner-employee of the S-Corp, you must pay yourself a salary, and pay payroll taxes on your salary. You don't have to pay yourself a high salary, but it must be a reasonable amount defined by irs . Reasonableness can be interpreted in different ways. I would keep track of the number of hours you work for your business, and then figure out a reasonable salary to pay yourself based on the amount of time you spend. Compensation of shareholder-employees should be based on the same criteria as salary for non-shareholders. Factors would include prevailing market rates; the individual's knowledge, skills, and abilities; amount of hours worked; and so forth. Salary is reasonable if a non-shareholder would be willing to accept the job at the proposed salary level

So the S-corp owner/employees do not have to have equal salaries. Both own 50% of the company, but one makes more than the other. Is that okay, or do they have to make the same salary?

Your state department of labor should produce statistical data relating to high/low/average/median wage for different job titles. But beware the trap of having too much remaining as non-wage net income, as distributions - this could cause problems down the road. IRS regulations do not specifically define what a reasonable wage is. However, there are available guidelines. Key factors include: the experience, education and skills of the officer-employee; the nature and importance of the work duties; the amount of time and effort invested in the work.