Shareholder Distributions for Sole S Corp Owners | Collective Help Center (2024)

FAQs

Can S Corp shareholders take distributions? ›

If a shareholder receives a non-dividend distribution from an S corporation, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis. Debt basis is not considered when determining the taxability of a distribution.

S Corp distributions are the method small business owners use to get paid while lowering their self-employment tax liability. Here's a look at how S Corp distributions work and how they can help you take more control over your tax bill.

An S corporation generally must have payroll to pay its employees and any shareholders who may be considered employees. After the salaries are paid, any remaining business profit may be passed through to the shareholders via distributions.

However, when your S Corp starts making money, the first thing you need to do is pay yourself reasonable employee compensation. If there's money left over after that, you can pay yourself distributions.

The earnings and profits generally represent C corporation earnings that were taxed to the corporation but were not distributed to the shareholders. A distribution from an S corporation that does not have any earnings and profits generally is a nontaxable return of the shareholder's basis in the corporate stock.

Shareholders will make capital gains (or losses) when selling shares, and may receive dividends if the company pays them. Shareholders also enjoy certain rights such as voting at shareholder meetings to approve the members of the board of directors, dividend distributions, or mergers.

You may or may not have heard of the S Corp Salary 60/40 rule. The guideline refers to setting reasonable compensation between 60% and 40% of the business's net profits. This guideline is not set by the IRS. It should not be relied on as the only factor when setting reasonable compensation.

The tax rate an owner/shareholder pays on S corp profits is determined by their individual income-tax rate, which can be anywhere from 10% to 37%, depending on the filer's total taxable income.

Officers in corporations must receive salaries with the appropriate withholdings (i.e., personal income tax payments). However, an S corp structure gives you the ability to pay yourself a salary as a W-2 employee AND take an owner's draw (here called a distribution) or a dividend.

Is it better to take a draw or salary? The answer is “it depends” as both have pros and cons. An owner's draw provides more flexibility — instead of paying yourself a fixed amount, your pay can be adjusted based on how well the business is doing or based on how much money you need.

How do shareholders get paid out? ›

A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends. Dividends are typically issued quarterly but can also be disbursed monthly or annually.

A payout is the share of profits that a listed company will pay its shareholders. If the payout set out in the company's shareholder remuneration policy is 50%, the company will distribute half of its net profits among its shareholders.

How to Take a Shareholder Distribution. Simply transfer funds from your business checking account to your personal checking account. You can use any method you would like for transferring the funds (except for Gusto, which should only be used for monthly payroll).

Personal Financial Needs. Your financial situation can also impact your decision to take a salary or an owner's draw. If you need a steady income to pay private bills, a salary may be a better option. If you have more flexibility in your finances, an owner's draw may provide more financial benefits.

The 50/50 rule refers to dividing up an S corp owner's pay and distribution structure with 50 percent going to salary and the other 50 percent to owner distributions. This rule has generally been applied as a way to define “reasonable compensation” that the IRS wouldn't question.

Taking Them Out In Wages

One of the best ways to transfer money out of an S corporation is via wages. In fact, paying yourself from your company account is a great way to transfer your money from one place to another without actually losing it.

Contributions to a retirement plan can only be made from compensation, which, in the case of a self-employed individual, is earned income. Distributions you receive as a shareholder of an S corporation do not constitute earned income for retirement plan purposes (see IRC Sections 401(c)(1) and 1402(a)(2)).

Shareholders can be employees of the business—this means that they can be paid salaries as employees. Employment taxes must be paid on the amounts received as salary. However, shareholders can also receive dividends from the corporation.

For many individuals, an owner's draw is classified as income and may be subject to federal, state, local, and self-employment taxes, so it's important to plan ahead before filing taxes.