Frequently Asked Questions:
Demystifying S-Corp Distributions

PostRichStreitfeld

Q: How do we take distributions from our S-Corp?
–Sol Sagan, Billions and Billions of Stars, Inc, Scituate
A: Structured properly, distributions from an S-Corp can save the owners thousands of dollars annually in payroll taxes. How? Distributions are profits remitted directly from the company to the owners without going through payroll, therefore not subject to either social security and medicare withholding OR the matching contribution required by the company — together, 15.3% of an employee’s wages. So if Sol takes $10,000 in distributions from B and B in February that he otherwise would have taken in salary, he is saving himself $1,530. Quite simply, he just writes a check from B and B to himself. (The profits are still subject to income tax.)

Of course, it’s not that easy.

First, you must have profits and be taking salaries in equal or (preferably) greater sums than you are distributing to yourselves. Otherwise you may be nabbed for evading those federal (and if applicable, state) payroll taxes. Generally, a good rule of thumb is minimum 60% salary, 40% distributions. So if Sol takes $10,000 in distributions he would be wise to take at least $15,000 in salary over the same time period.

Q: Can I take these distributions at the speed of light?
–Sagan
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.
Galaxy
Q: Will I fall into a black tax hole?
–Sagan, again
A: Your distributions are not subject to payroll tax, but they are part of the net income that will accrue to you as a shareholder and be reflected on your personal income tax return. I recommend you either increase your withholding on the salary portion, or make estimated tax payments to cover the liability. Consult a tax adviser?

Q: I have a co-owner in a parallel universe. Advise.
–Carl, Sagacity
A: Distributions must be made by percentage of ownership. But you must simultaneously insure that the total salary of each owner exceeds his or her distributions, as per the first “rule of thumb.” More complicated. Consult a tax adviser who can set up an S-Corp and also knows math?

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