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

FAQs

How much can an S Corp owner take in distributions? ›

The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.

A shareholder distribution is a way to take funds out of your business without incurring payroll taxes. For a solely owned S Corporation, this is achieved by transferring funds from your business checking account to your personal bank account.

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.

A distribution is a company's payment of cash, stock, or physical product to its shareholders. Distributions are allocations of capital and income throughout the calendar year. When a corporation earns profits, it can choose to reinvest funds in the business and pay portions of profits to its shareholders.

Contrary to the belief of some, S Corp distributions are taxable. While they're not subject to self-employment taxes, you must pay taxes on distributions at your regular income tax rate. According to IRS rules, small business income isn't tax-free income.

You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you're under age 59 1/2.

Distributions are simply a cash transfer from the business bank account to personal bank accounts of shareholders. Distributions can be made via ACH, Zelle, check, etc. The method doesn't matter. It's simply a transfer of funds categorized as a Shareholder Distribution.

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.

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.

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.

What is the tax rate for S Corp distributions? ›

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.

However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate. There are no specific guidelines for reasonable compensation in the Code or the Regulations.

In general, every corporation making any distribution of $600 or more during a calendar year to any shareholder in liquidation of the whole or any part of its capital stock must file an information return on Forms 1096 and 1099-DIV.

Since S corporation income is not subject to self-employment tax, there is tremendous motivation for shareholder-employees to minimize their salary in favor of distributions, which are not subject to payroll or self-employment tax.

The 60-40 approach is an arbitrary rule, and CPAs should understand that. A more logical rule is to make the salary a percentage of the net business income of the S corporation before considering the salary deduction, for example, between 30% and 40%.

A: Distributions do not need to be taken on a regular basis, they can be irregular, and the amounts can vary. The important thing is that by the end of the year they not represent more than (using the rule of thumb) 40% of your total monies received by the corporation.

Unlike a C corp, S corps don't usually make general dividend distributions. Instead, S corp owners can draw money from the business by using shareholder distributions. A shareholder distribution is a payment from the S corp's earnings taxed at the shareholder level.

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.