S Corporation Wages and Distributions: Basic Tax Planning

S Corporation Wages and Distributions: Basic Tax Planning

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A majority of American small businesses use the S corporation form of doing business.

This article discusses one of the main tax planning techniques an S corporation can use to save taxes.

The S Corporation and Payments to Shareholder/Employees?

An S corporation is a pass-through entity and does not pay federal income tax.

The net earnings of the S corporation are passed through to the shareholders of the company and reported on their individual income tax returns.

Typically, an owner of stock in an S corporation also performs services for the company making him, in addition to an investor in the company, an employee of the company.

So what is the proper tax treatment of monies that are paid from business profits to the S corporation investor/employee?

Setting aside payments from the S corporation to the investor/employee that are loans, repayment of loans or returns of capital previously invested by him, there are two categories of payments to the investor/employee:

  1. Wages; and
  2. Shareholder Distributions.

Here is how each category is treated for tax purposes:

Tax Treatment of Wages – Wages paid to an investor/employee of an S corporation are treated like wages paid to any other employee.

Federal withholding and FICA taxes are withheld from the investor/employee’s paychecks in accordance and the investor/employee receives a net check at the end of every pay period.

The S corporation must “match” and pay over to the IRS an amount equal to the FICA portion of the tax withholding.

Under current law, the employee is required to pay (and have withheld) 7.65% of his wages toward Social Security (6.2%) and Medicare (1.45%). This means the S corporation must also pay over to the IRS, out of its own funds, 7.65% of the employees wages.

(Note: In 2009 the Social Security part of the FICA tax only applies to wages up to $106,800)

The combined FICA remittance, then, is 15.3% (2 x 7.65%).

The S corporation is entitled to deduct the amount of gross wages it pays to its employees, including its investor/employees, in determining the amount of net income that will be passed through and taxed on the S corporation’s shareholders’ returns.

The S corporation issues a form W-2 to the investor/employee and the investor/employee must include the wages on his federal income tax return.

Tax Treatment of Shareholder Distributions – Shareholder distributions are treated differently than wages because they are deemed to be a return on the investor/employee’s investment in the S corporation and not compensation for services rendered.

Distributions to a shareholder must be included in the shareholders taxable income; however, the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax.

No W-2 or 1099 need be issued by the S corporation to the shareholder and the S corporation has no FICA matching requirement since no FICA tax is due.

Here are two examples that illustrate the differences in the tax treatment of wages and shareholder distributions:

Example #1 – All Wages and No Shareholder Distributions

Capone, Inc. is an S corporation. It has one shareholder who also performs services for the company.

In 2009, the S corporation pays $80,000 of wages to it’s sole shareholder and zero shareholder distributions.

Here is the FICA calculation for the wages paid to the shareholder:

  • Withheld from shareholder (investor/employee):  $ 6,120 (7.65% x 80,000)
  • Employer matching (paid from S corp funds): 6,120
  • Total FICA tax paid:  $12,240

The S corporation will issue a W-2 to its shareholder in the amount of $100,000 $80,000 and the shareholder must report that as income from wages on his personal tax return.

Example #2- 50% Wages and 50% Shareholder Distributions 

Same facts as Example #1 except that Capone, Inc. pays $40,000 of wages to its sole shareholder and $40,000 of shareholder distributions.

  • Withheld from shareholder (investor/employee):  $ 3,060 (7.65% x 40,000)
  • Employer matching (paid from S corp funds): 3,060
  • Total FICA tax paid:  $6,120

The shareholder gets a W-2 for $40,000 and reports that as wages on his return. The $40,000 of shareholder distributions is reported on Schedule E (PDF) of the return and is not subject to self-employment tax. 


By shifting $40,000 from wages to shareholder distributions there is a tax savings of $6,120.

The above examples show that for every dollar (up to the Social Security wage limit of $106,800) that is shifted from wages to shareholder distributions there will be a savings of 15.3%.


An investor/employee wears two hats: First, he is an investor who is entitled to expect a return on his investment. Second, he is an employee who performs services for compensation.

Consequently, it makes sense that there be some apportionment between what the shareholder is paid for his services and how much he  receives as a return on his investment.

However, there is much abuse in this area of tax planning and taxpayers should consult their tax advisors before determining how to apportion payments between wages and shareholder distributions.

In the last decade the IRS has promised to select S corporation returns for audit based on this issue, but I have not yet seen or heard of a case where the IRS selected an S corporation return for audit based on this issue alone.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. Leftfield says:

    In example 1 it says S corporation pays $80,000 of wages, but then says the W-2 will say $100,000? Is that right?

  2. Oops.

    Thanks. I changed it.

  3. Christ T. says:

    You initially point out that S corps are pass through entities, for all of the net earnings.

    Whatever is the net, constitutes the additional taxable (non-earned) income of the entitie’s shareholder(s).

    Later on in ex. 2 you talk about shareholder distribution, which you treat as the additional taxable (non-earned) income.

    However, it does not matter, to my knowledge, whether there actually is any distribution or not, it is the net earnings itself that constitutes the taxable portion.

    Thus, if in your ex. #2 the S corp has net earnings of 40k, but RETAINS, and does not distribute at all, this 40k, the tax consequence is as you indicate.
    If the company then were to later on make an actual distribution, of say, 20k, there would be no further consequence, as it has already been taxed, as part of the 40k net earnings, as per K-1.

    Please comment on this confusion between distribution and net earnings

  4. Chris,

    Thanks for the comment.

    You’re right.

    The 4ok is taxed to the shareholder whether or not it is distributed.

    However, if he had been paying himself 80k in wages and he reduces his wages to 40k the assumption is that he intends to actually distribute the other 40k.

  5. I have heard that the new administration may be eliminating the FICA savings that S-Corp officers now realize.

    In other words, officers will pay FICA on all their earnings, both wages and payments made to/as investor/employees, just like an LLC.

    Any update on that? And, what might an S-Corp consider doing it that does occur?

    Thank You!

  6. Amber,

    Thanks for visiting.

    I have heard some suggest that all S corp payments made to owners should be subject to FICA tax, but so far nothing has been seriously proposed.

    It is not part of the current Obama tax proposals.

  7. question:
    I am 49% of a S. Corporation and the other partner is 51% and I left my practice the end of may. Since then, I have not received any draws, but my professional partner continued to take draws. In the end, I was taxed on the $130k draws that I did not recieve. Is that money owed to me?

  8. Traci,

    I need more information.

    When and how did you leave the S corporation?

    Were you paid for your 49% interest?

    Did you enter into a Stock Purchase and Sale Contract with the S corporation and/or the other shareholder?

  9. Gave a verbal notice 1 year prior to leaving. I was to leave the end of the month and the middle of May on a Thursday, he said to go. That night, the locks were changed.

    No, I was not paid the 49% interest.

  10. Traci,

    Your former “partner” has almost certainly violated the S corp rule about “one class of stock”. If you own 49%, the s corp must make 49% of the distributions to you.

    I would ask your 51% partner to talk with the CPA about disproportionate distributions and how this will, if uncorrected, cause the S corporation status to terminate.

    In short, your partner has screwed up.

  11. Peter,

    Is there an exception to the statement that an S-Corp cannot dedecuct benefits for a 2% owner?
    Internal Revenue Bulletin 2008-20dated January 14, 2008 seems to make an exception for Health Insurance Benefits which meet the Bulletins requirements.

    Am I reading the Bulletin correctly?


  12. My employer made me a 10% shareholder in a small buisness back in 2001 in an S-corp. I have never received any financial benefits from this. He had gotten audited a few years ago and he removed me as a shareholder. Is that legal? Did he use my name for financial gain? Am I entitled to anything? The only record I have that I was a shareholder are my tax returns from 2002 from my employers bookeeper stating that I own 144 shares with forms S-corp and K forms.

  13. In your example of 80k split 40k as earning and 40k as distributions…how is the 40k distribution taxed? I can not imagine that the IRS will allow you to get 40k of “free”money?

  14. Brandon,

    The 40k is taxed as ordinary income on the shareholder’s 1040, but it is not subject to self-employment tax.

    The shareholder saves 15.3% of 40k or $6,120.

  15. How does this affect profit for the company. Does the distribution count as an expense? Since the 40k is taxes as ordinary income.

  16. amee,

    Thanks for visiting.

    The distribution is from net profits. In other words, it is after corporate expenses.

  17. If one of the owners of an S Corp does not actively participate on the business but takes distributions, is this passive income (there is no investment and the business is not from rental, royalties, but consulting services)

  18. Brad,

    Thanks for visiting.

    The income is ordinary and taxed at ordinary tax rates. The fact that it’s passive is irrelevant.

  19. If I’m understanding everything I’m reading here, the S Corp pays my husband(the only officer) a set salary, and anything above that after expenses is added on our personal 1040 tax returns on line 17 with attached schedule E. The amt reported on schedule E, should that include what is left over in our company account and then another line for distributions? But, if we don’t take a distribution, this does not get calculated into our next years company’s returns correct?

  20. Another quick couple of questions, in terms of distributions, for the S Corp, is there an amt limit that starts requiring us to do estimated taxes throughout the tax year and also is it better or a benefit to take a one time distribution or monthly distributions? Also, when people talk abt distributions or dividends, are those being used interchangeably or are they handled differently.

  21. Tina,

    You have to include it whether it’s distributed or not.

  22. Tina,

    Good questions.

    There is no limit, but there are safe harbors. See my blogpost titled IRS Underpayment Penalty Safe Harbor Rules.

    The timing of the distributions you take has more to do with your need for the money, than any tax considerations.

    Unless you converted to an S Corporation from a C Corporation, you don’t have to worry about dividends. Dividends are the payment of distributions from a C corporation or from the earnings and profits of a former C Corporation. When you pay out money from the profits of an S Corporation it is simply called a distribution.

  23. So, just to clarify, in the 1st response, regardless if there is a distribution or not, all the $ in the company account (minus salary & allowable deductions) must be included. Also, after reading the safe harbors, last yr since it was started in 08, he did not owe anything, we are not sure if we have to this year with deductions, but if do, then this coming up year if we pay estimated taxes then we would not be penalized, is this correct? To further expand on this, the S Corp gets a base salary but may or may not get a bonus, how does that get rectified in terms of estimated taxes if we are not sure the amt, if any at all? Thanks.

  24. We’re an S Corp, is the draw we take out subject to personal income tax or is that paid through the corporation? My accountant is telling me that I pay my taxes through the corporation and what we take out is not subject to personal income tax.

  25. Mike,

    Get a new accountant.

    Shareholders are taxed on their share (based on ownership percentage) of S Corporation net profits whether or not it is actually distributed.

  26. I need some assistance not only with my taxes but also with my payroll for my S Corp. I had a friend handling my s corp and for the last two years he stated that I did not have to pay my employees (which is my husband and I) wages. That I can just do a Sch. K-1 at the end of the year with the remainder of the profit left after all the deductions, which is very low so far. I am now finding out that this is incorrect and for 2008 my taxes were filed with only a K-1 and not W2’s were given or placed on line 7 of the 1120S form. This will be my 2nd year of doing my taxes for my S corp and I still have not paid any FICA for the year 2009 for my husband and I (employees and officers of the S Corp.). I need to get my company on track and need someone to assist me with setting up what I need to do so I can pay employee taxes (if not to late for 2009) and if it is too late to at least get it going for 2010. I don’t know what to do at this point and at a loss. I am hoping that you will be able to assist me with all of this. Can’t we just issue a W2 without any fica/SE/SS deductions on it? Thank you and look forward to hearing from you.

  27. So, I’ve been looking forward to getting an answer to myabove question and was wondering if you have any comments on my questions.


  28. Tina,

    Undistributed profits of your S Corporation must be included on your 1040. You don’t measure profits by what’s in your bank account at the end of the year. I suggest you hire a good CPA or bookkeeper to keep your books for you.

    Regarding the estimated payment safe harbors, the safe harbor payment is not the amount you owed at the end of the prior year, but rather, your total tax liability for the prior year.

    Bonuses are taxable as wages. Distributions are neither wages nor self-employed income.

    Again, I suggest you hire a CPA to assist you with your tax planning and the maintenance of your books.

  29. Its great you have this site. My question is: my wife owns an S-Corp(just started Oct 2009) and has paid herself a total salary of $5000 for those 3 months. Does that $5000 get reported as “other income” on our 1040 since she didnt generate a W2?

  30. My boss in our 25-person S-corporation has withheld paying out the S distributions for the past 3 years, saying that he “eventually” would pay them, but now is looking to use the cash (currently sitting in a CD) to boost the company valuation in anticipation of setting up an ESOP so he can sell it off and retire from running it. This is after having paid out an S distribution in the prior 22 years. I should mention that he DOES write out a portion of the distribution as a check so we can cover (pretty much!) the tax obligation. I’m not happy, and I’m wondering – is there a potential for a (successful) lawsuit here to get the money I’ve paid taxes on? Since he owns 80% of the stock, we have no say on what transpires.

  31. Bob, I would need a lot more information before I gave you advise on this question. For instance, do you have a Shareholders Agreement? Who are the board members? Who is the President of the company? Etc.

  32. Peter,

    We have a 2 employee S-Corp with each employee also having a 50% ownership. Previously we have been doing a distribution to each shareholder at tax time to cover the company’s portion of the taxes. Both shareholders did this by calculating our taxes without the distributions (K-1), and then adding in the K-1, which gave us the “tax difference”. Then, the company would do a distribution to cover the difference. We found this seems to work well, however, we just found out that distributions need to be equal. Any way around this, or any recommendations?


  33. Doug,

    Thanks for your question. I would record on the S Corporation’s balance sheet a loan to the shareholder who received the greater distribution (the amount of the loan will be the excess of his distribution over the other shareholder’s distribution).

    Also, I would prepare a simple promissory note and charge a reasonable rate of interest on the shareholder loan to demonstrate that it is bona fide.

  34. Hi Peter! On February 5th of 2009, I sold the stock of an S Corp to my 50% partner for a nominal sum of $1,000. Prior to that point, my basis (active participant) had fallen to zero due to NOL deductions over the previous years. I am currently awaiting the arrival of the final K-1 which I believe will have my portion (50%) of either income or loss for the time period up until the date of sale… 17/365. I know how to deal with the profit or loss from the K-1 but am not sure where to list the $1,000 profit I received from the sale of the stock (not an asset sale) – Will that $1,000 distribution be listed in the K-1 and included or do I need to list it somewhere else, possible as a capital gain tax on my 1040? Any help would be greatly appreciated.


  35. Amy,

    The amount you received for your shares in the S corporation should not show up on the K-1. Make sure it’s not on there so you don’t double report it.

    Report the $1k sale proceeds on Schedule D of your 1040 as the sale of a capital asset.

  36. Thank you very much for the help!

  37. Peter,

    My business partner and I own a company in CO that is an S corp. We each own 50%. I have decided to leave to pursue another opportunity. However, I would like to still own the company. My business partner agrees. Since he will continue to run the company, we want to take me off the pay roll and give him 100% of the money / payroll. In otherwords, instead of me taking half of the income, he will take it all. Is this possible under an Scorp?

    thanks, Bill

  38. Bill,

    Thanks for the question.

    There is no requirement that employees of the company, including shareholder employees, receive equal wages. The only requirement is that distributions from profits (after wages are paid) be in proportion to the shareholder’s percentage interest in the corporation.

    Don’t let him take all the money out as wages. Even if you are not actively involved in the business, you should get a return on your investment – that is what distributions are for.

  39. If an S Corp stockholder receives distributions in excess of his basis and must report this on his personal tax return (schedule D) as a capital gain, will this information be passed to the shareholder in some manner? Will any of this information show up somewhere on the K1 or the corporate tax return? Or is the shareholder just supposed to figure out his own capital gain and report it himself?

  40. Peter,

    I’m 50/50 with my brother in an S corp. My brother does the majority of the work and makes a salary of $40k, FICA paid. I make $10k, FICA paid. On top of this we each pay ourselves $10k in distributions. We have left a significant amount of profit in the company. We pass through the profit each year on our 1040 as we should. My question is how would we pay out this profit that has accumulated over the years? Are there any taxes that still apply to it?

    Thanks, Ryan

  41. Ryan, assuming the business has been an S corporation since inception you shouldn’t be taxed on the actual distriution of profits because, presumably, you’ve already paid taxes on them. If the business was once a C corporation that was later converted to an S corporation, the answer is more complex and I would need a lot more information.

  42. Peter, thanks for your response. We have been an S corp since inception. I understood that the income taxes had already paid. So we could technically write ourselves equal checks for past profits and don’t need to report them in any way?


  43. Peter,
    I have a question, when is the latest that acompany can take distribution? Can we take distribution for the year 2009, now? Or is it too late?
    Please let me know,

  44. Peter,

    I’ve set up an S-Corp in Florida in November with no income to date. As you know Florida has no state income tax. My question is since I have no income on line 22c of my 1120S do I still need to file state income tax for the s-corp?
    Thank you!

  45. There are several types of payments an S corporation can make to its shareholders, including, but not limited to:

      Wages (if the shareholder is also an employee)
      Returns of capital
      Loans to the shareholder
      Repayment of loans from the Shareholder

    Distributions are payments made to a shareholder from the current and/or accumulated profits of the S corporation. They can be made at any time as long as they are made in proportion to the shareholders’ percentage interest in the corporation.

    Unless you are taking distributions in excess of basis, the year in which you receive a distribution (as opposed to one of the other types of shareholder payments) is immaterial.

  46. Mike,

    I was in the same boat. Maybe this information will help you:

    From the FL Department of Revenue web site:

    “S Corporations and tax-exempt organizations usually do not have to file a Florida corporate income tax return if they do not have federal taxable income.”

    From the article on this page:

    “An S corporation is a pass-through entity and does not pay federal income tax.
    The net earnings of the S corporation are passed through to the shareholders of the company and reported on their individual income tax returns.”

  47. I own an S Corp and took a $3000 distribution in addition to my salary in 2009. Where do I account for the $3000 distribution on my 1040?

  48. Chris,

    Use Form 1040, Schedule “E” to report your distributive share (whether actually distributed or not) of S Corporation profits.

  49. Peter,

    I am 100% owner of an s corp based in NY. I am a landlord of an apartment building. The company has always been an s corp since day 1.

    My question is, since 2004 my s corp has made a small profit but I’ve never bothered to give myself a shareholder distribution.

    I want to know if I can go back from 2004-2009 and claim the profits my s corp made and give myself a nice shareholder distribution or did I waive my rights to collect the distributions by allowing too much time to pass by?

  50. Peter,


    Due to less maintenance issues among other things, the projected net profit for my s corp is looking to be around 200K. It has never been this high. Its always been around the 30K mark.

    My question is, since I only pay myself 60K a year in salary wages (FICA paid) and my s corp’s taxes are “flow-through” to my personal taxes, I’m facing a huge tax bill for the potential 200K net profit for 2010 that I can not afford to pay on a personal level since I only get 60K in salary.

    So I need to know if there is some kind of strategy you recommend I can use to come up with the money to pay the taxes on the 200K or a strategy to lower my s corp’s net profit to the flow-through taxes wouldn’t be so high?

    For example: If the s corp lends me money, is that considered an expense for the company which ultimately lowers the net profit of the company come tax time? Hence less taxes to pay on the flow-through?

  51. Peter,

    I have been a shareholder of a S-corporation for 2 years. In the past 2 years of k-1, I have been paying taxes on distributions I never received. Also, I made a $25000 loan to the president of the corporation and he promised to pay me back. when the corporation was terminated and reformed after re-financing, he paid me $26000 over what I put in (so i actually only made $1000 on the initial investment) but I am afraid that he will try to put more income on my k-1 this year so he doesn’t have to pay the tax on the gains he received from the loan refinance. Also, how do I make sure I do not get taxed on the $25,000 that he added to my sale of stock? Would a promissary note suffice? The initial $25,000 check was made out to him and not the corporation. Please help! Is there any legal recourse I have on what’s on the K-1 and how it’s constructed so it does not penalize me?

  52. Nick,

    There are many potential issues here. I suggest you have your tax preparer discuss these issues with the S corporation’s tax preparer to make sure everyone is on the same page.

  53. If you own 100% of the stock of the S corporation, you can do anything you want with the corporation funds. If there is money in the corporate accounts, by all means pay yourself if you deem it appropriate.

    If you haven’t reported the S corporation income you need to do so by either filing the S corporation returns or amending them to include the unreported income. You will also need to amend your personal tax return to account for the pass-through of these changes.

    I suggest you hire a CPA tax preparer to advise you on these matters.

  54. Bob,

    My first question is, if you made 200k in profit but there is only 60k available to pay you (the wage amount), where did the other 140k go? I have to assume it went to paying down debt. Is that true?

    These are potentially complex issues and the numbers are large enough to justify the hiring of a CPA tax preparer. I suggest you do so immediately.

  55. Nick,

    Thanks for the question, but these are complex issues. I suggest you hire a qualified CPA tax preparer to advise you.

  56. Peter,

    I think you misunderstood my question in #51. After the s corp pays my 60K annual salary, for 2010 I am projecting the s corp to net about 200K in s corp profit. The s corp has never netted this huge amount before.

    The s corp has normally netted in the past around 30K after all expenses and my salary is paid.

    I have NEVER taken shareholder distribution in the past and always left the profit in the business as “reserve” money in cases some huge and expensive repair job catches me by surprise like replacing the boiler, roof, etc. I wanted to make sure I had enough money to fund the repairs if it were to occur.

    The potential problem I will be facing in 2010 is I can not afford to pay out of my OWN pockets the flow-through s corp taxes on the 200K net profit on my 60K annual salary unless I give myself a salary raise which doesn’t make sense tax wise.

    So I need to know if there is some kind of strategy you recommend I can use to come up with the money to pay the taxes on the 200K or a strategy to lower my s corp’s net profit so the flow-through taxes wouldn’t be so high?

    Is it a good idea to take out a shareholder distribution from the net profit the s corp made to cover the amount of taxes I will have to pay on the flow-through taxes?

  57. Peter,

    I have one question related to my earlier question. The S-corporation that I was 10% owner in was refinanced and $600,000 were given out. However, I wanted out, so I got back my intial investment of $100,000 but I never got any of the $600,000 distribution (which would have been $60,000). On the K-1, would my assumed share of the distribution (10% ownership) = $60000 show up and would I be held liable to pay taxes on that even though the president of the dissolved company did not give me a dime? A new company was formed after the refinancing and I am not part of that new company. Please help I feel like I can’t sleep until I get that k-1. Is there any way that the distributions he kept to himself be taxed on his return and not mine? And what would happen if I did not report that on my return? Would the IRS come after him because he kept my distribution money?

  58. Peter,

    Thanks for this blog post and the responses you have given in the comments, even after almost a year of posting it. I have learned a lot from your answers.

    I have an situation where myself and two partners have registered as an S-Corp. Because I am the last partner to join the trio and I’m about a year behind them on product development/design, I was brought on with a 20% share of the company and my partners having a 40% share. We each have contributed the appropriate percentages to a corporate account for our stock. Since we’re bootstrapping this on our own, we are splitting expenses evenly (mostly legal right now). I was wondering how we should keep track of what we’re essentially loaning to the company. Since we eventually plan on being reimbursed by the company for all of these (as we start getting customers) should we treat the repayment of these loans as part of the losses in the balance sheet of the company?

  59. Hi, this blog seems to be very helpful.

    A straightforward question, but about which I can’t seem to find the answer (without consulting a paid tax adviser, I suppose):

    I am 100% owner of an S-4; I pay out 100% of the profits each year via 1099. I use Turbotax Business and Premier for the S4’s and my personal taxes. The S-4 receives its revenue via 1099 income.

    Where do the FICA/SS taxes get calculated and paid, and what mechanism is used to make the payment?

  60. Kelly,

    What is an S-4? And why not hire a paid tax adviser? A good one will save you money in the long run.

    Good luck.

  61. “Does an S Corp pass-through incomes as recorded on the Schedule K-1 of Form 1120S, apply towards the Social Security yearly earnings income limit amount of $14,160.00? Is there any Documentation that directly addresses this issue?”

  62. I bowed out of an s-corp early in the year. I’ve just received a k-1 that has my % of income as if I’d been in it all year. Shouldn’t it be pro-rated? Also, if the now owner took a distro at year end to pay taxes on the profit do the rules apply that I should receive distro based on % of ownership? Thanks

  63. John,

    The percentage shown on your K-1 should not change, but the calculation of your share of income/loss should be pro-rated (or the company should have done an actual cut off of the books when you ceased being a shareholder).

    The equal distribution rules still apply.

    These are potentially complex issues and I suggest you hire a professional tax advisor to help you with them.

    Good luck.

  64. In an S corp, is there a time limit on when you have to take a distribution? My situation is that I already paid tax on my business profit from 2008, but never took out this money. Thanks

  65. I have been the sole owner of an S Corp since 2006. I have not taken any distributions to date. In 2009 I issued the remaining 50% of the authorized shares to another investor. I’m in need of funds now (in addition to my salary) and I’d like to withdraw the accumulated profits since 2006. If I’m understanding correctly, we have to distribute equal amounts. Is there any way I can access the funds without the new shareholder getting any of it – since he wasn’t around to help earn it and since he doesn’t have enough basis yet to cover the amount of distribution that I need? Thank you so much for this blog – it’s been a big help.

  66. Kevin,

    Thanks for the question. There is no time limit for distributions. Just make sure you get paid while the company has the funds to make the payment or you could be out of luck.

  67. Ed,

    The distributions must be proportionate to shareholder interest, not necessarily “equal.”

    You owned 100%, that means a proportionate distribution would be 100% to you.

    Before you do anything, consult a competent tax advisor because these rules can be tricky. It’s worth a few bucks to make sure you do it right.

  68. Sorry; my prior posting should have referred to an S Corp., not an S-4.

  69. Peter,
    What a great post – I have learned a lot. I am the new accountant for a new LLC, which we will probably file to be treated as an S Corp. My question is this: The company will have very little expenses, and very little management needed. Salesppl & me will be paid as 1099 contractors. The owners will be doing very little actual work. I don’t want to be audited for having $0 or very little wages listed on the 1020s. Any suggestions on how to go about this?


  70. Instead of ‘wages,’ I meant that I didn’t want to put $0 for line 7 – Compensation of Officers.

  71. Kristy,

    If the owners are not doing the work, who is? Does the company have employees? How much profit will be distributed?

    It’s not low wages that could get you audited, but rather the low ratio of wages to distributions.

    The truth is, if you are working for the company, you are, at least to some extent, an employee. Therefore, you should receive some wages. A “zero” in the wage line is bound to get scrutiny.

  72. Compensation of officers is still wages.

  73. Okay… One of the officers will be doing the bulk of the work required in running the company. However, they anticipate huge profits (of course! :)) and very little work after initial setup, etc. Sales will be done by 1099 contractors (their payments would go on line 8 of the 1020S, right?) and my work could go on line 7 or 8, depending on how we decide my official role in the company. So, an example. Let’s say the net profit for 2010 is $500,000. If line 7 “Compensation of Officers” is only $20000 for the part-time work that the one owner does, and line 8 is $70000 or so, and distributions are the rest of the net profit, then is that considered okay? Is $20000 reasonable considering a $500000 net profit? A lot of the business is automated. (I’m not expecting legal advice, per se, just an idea on what to consider when helping to set up the company.)

  74. Sorry – 1120S, not 1020S. 😀

  75. Hi Peter,

    Thanks for all the answers you have posted on here. I have read them all and they’re very helpful.

    You mentioned “it’s not low wages that could get you audited, but rather the low ratio of wages to distributions.”

    If my S corp was only making $1000 a month, would it be ok to give myself a $500 monthly wage and a $500 monthly distribution?

  76. John,

    There are no hard and fast rules that apply to all situations and circumstances, but, having said that, 50% to wages and 50% to distributions sounds very reasonable and fair to me and I doubt seriously it will cause you any problem with the IRS.

  77. Thanks Peter!

  78. S-corp distributions to the individual are not reported on any kind of income declaration form such as a 1099-DIV. A Schedule K-1 is the reporting form for IRS purposes for the individual’s represented share of the S-corp. Question: Are the “distributions” reportable as income in addition to what’s reported from the Schedule K-1?

  79. The S corp I work for had me cut checks to the shareholders for distributions, and one of the owners mentioned in his email that he’s making the distributions to pay off some AR balances. I only have a limited accounting background, but it sounds a little suspicious to clear AR balances by making distributions. Is this legal?

  80. I am a 50% partner in an S-Corp and have a partner who won’t show me the books, claims the company doesn’t make any profits and he takes 30% taxes out of my earned commission from real estate transactions which I believe is me paying my portion and the company’s portion of FICA. I have never recieved distributions or a drawer… He is very narsastic, Help!

  81. Sandy,

    You have a right to see the books and probably can sue him to make him show them to you. Hire a lawyer.

  82. Mary,

    I am not sure what you mean by by AR balances. Usually, AR means accounts receivable. Accounts receivable don’t get paid, they get collected. In any case, I need more information before I can answer your question.

  83. Peter,

    To clarify the email sent by one of the owner’s is as follows:
    “Subject: Distributions”
    “We are making a year end distribution to pay off some account receivable balances that our CPA is carrying on our books, the CPA will make those adjustments. Please make the following checks before year end
    Shareholder A: $90,000
    Shareholder B: $11,000”

    Some background info: The business is an S-Corp and it is NOT publicly traded. This is a restaurant and we don’t maintain customer accounts so I’m confused why the AR balances are mentioned. Could the owner have meant AP balances? Bottom line is I’m concerned the owners are committing fraud and I don’t want a part in it. But I’m just not fully comprehending what the implications are of this type of transaction.

  84. Peter,

    I did some more research at work. Normally, when I make checks for distributions, I leave them uncategorized and our CPA goes in and categorizes them into the correct account. I now see that these checks are made by debiting an expense account. From my limited knowledge, I know that you cannot make distributions by debiting an expense account. Correct?

  85. I am a business owner of several yogurt stores and it was operated as an S corp., Recently, I added a new store to this S corp. By that meant, two businesses are using the same federal and states taxes ID. After opened for two months, new business was so slow so we decided to shut it down . How do I report it to the IRS and the franchise tax board? Please advise.

  86. An S corporation determines taxable income at the corporate level and then its shareholders pay tax on their allocated share of that corporate income. Why aren’t all of the s corporation’s receipts and expenses “netted” at the corporate level to determine the S corporation’s taxable income? What is the logic behind the way that S corporation taxable income is determined?

  87. Alina,

    An S Corporation reports its gross income and its expenses on form 1120S. The net income is reported on the shareholders personal income tax returns.

  88. My s-corp is basically inactive with no income. Business still owes withholding taxes. Am I personally liable and can my assets be levied?

  89. nicole,

    “Responsible persons” can be assessed a trust fund recovery penalty in the amount of taxes that were withheld (Federal withholding and the employee’s share of social security taxes) from the employee’s paychecks.

  90. What exactly is a trust fund recovery penalty?

  91. Would we receive notification of this collection personally? Only have received mailings in the business name thus far. I didn’t want my personal bank accounts to be garnished “out of the blue”.

  92. Hi, Peter.

    This is what I am looking to know…

    I am on disability. I am starting an S Corp as an investment and I have no one else that I can put on as an officer, etc. I do have someone who will be basically doing all the work making all the money as an independent contractor. We will be splitting the profit. Since I will be basically doing none of the work, I do not want to draw a salary for social security reasons. I will only take whatever necessary distributions I need to take to pay bills. The rest will be reinvested into the company.

    I guess my question is this… Am I able to take no salary (or maybe $500 mo.) and have everything as a distribution, and if so, when I file, it will all be passive “unearned” income, and taxed as such (NOT as earned income) is this right?

    If not, what would you suggest? I CANNOT afford to lose my social security.

    Also, wouldn’t it be possible to hire a payroll company if I end up having any employees? I have a friend with an LLC who pays all his employees thru the payroll company, thus avoiding the need to have to personally deal with payroll/employee tax withholding/ workers comp, etc. issues. That makes a lot of sense to me!

  93. Also, I live in FL where wages are notoriously low. If I only “work” 2 hours a day making $15 per hour (which is VERY high here for a clerical position) that would be $30 day x 5 days max for $150 week x 4 wks which is $600 per month. Can they MAKE you make $2000 per hour??? I would expect to make what anyone else here in FL would make (should they be lucky enough to HAVE a job) and then the rest should then be able to be distributions, wouldn’t that be correct?…. How could they fault that, provided you can prove that someone else is doing all the other work?

  94. Peter…

    I am anxiously awaiting to see what your reply(s) will be. (I must check this 4 times a day, lol.) One other thing is…

    If you are JUST STARTING OUT and have never owned an s corp before, OTHER THAN paying what would be considered “normal” wages for an area, HOW would the company even KNOW what to pay as “wages” if you haven’t made any before in the company? I guess I am back to this… If the company maybe puts in it’s articles to pay “reasonable” wages (officers $50 per hour for any meetings, $10 – $15 per hour for clerical work, etc.) wouldn’t that pretty much cover the “wage” requirement, even though at the end of the year, the “wages” may be quite different than the “distribution” amount? Because you can’t pay huge wages if you don’t know what you will make… I certainly can’t take $40k in “wages” in a year and then only leterally make $10k in profit… Corp would go bankrupt!!!

    Also, if you start out with $50 cash and buy $50k in tangible assets (cars) and make $10k profit, reinvest it so that you have $60k in cars, make $15k profit, reinvest it, etc. over and over and over again… At the end of the year if the “profit” is tied up in tangible assets, say you are sitting with 30 cars on Dec 31st, thus having no “profit” in the bank TO DISTRIBUTE, are you taxed on the asset, even tho it CANNOT be distributed unitl they are resold again?

    This is all so new to me, that any info would be greatly appreciated!!!


  95. Sherri,

    Three things:

    1. The IRS looks at the salaries of employees in similar industries to determine a reasonable wage. There are several websites that provide this information.

    2. The problem you raise about determing whether or not the company is making sufficient money to pay out salaries is not a problem at all. At the end of the tax year you will know whether or not the company made a profit and at that time you can pay yourself a wage bonus and deduct the appropriate payroll taxes from it.

    3. S Corporation shareholders are taxed on their distributive share of corporate profits regardless of whether or not those profits are actually distributed. In other words, in your example, it doesn’t matter that the corporation retained the profits or distributed them. Corporations that wish to retain profits often choose the C corporation form for this reason. This is also one of the reasons S corporation shareholders enter into an agreement requiring the corporation to distribute at least enough profits to cover the shareholders’ increased tax liability.

    These are complex questions and you should not rely on my advice to determine what course of action to take. I recommend that you hire an experienced CPA or tax attorney to advise you.

    Good luck.

  96. Peter,

    My husband and I were 50/50 but just recently we amended the shares to 51/49 so that I could be treated as a minority business. This change was only made on sunbiz.org. It was verbally agreed upon by my husband and I. Now the situation has changed and we are getting a divorce. My question is, is my 51% legal enough to get him removed from the shop because he is taking cash out of the draw and the bank for personal use when the shop can’t handle it. We have only been in business for a 1yr and it is just now getting on its feet. I can’t manage the shop if he is taking funds that should be paying the bills. For example, he took the 4k that was needed to pay the Federal payroll taxes for this past quarter. What can I do. This is driving me crazy.


  97. Jenni,

    I need more information to advise you on a course of action. I recommend you consult with a lawyer, preferably a divorce lawyer who has a solid business background.

    The issues are complicated. If he has signature authority on the bank accounts he has the right to withdraw the money, so you might want to start by talking to the bank.

    But, please, get a lawyer. You don’t want to rely on the advice of a tax blogger whom you have not retained and whom does not have all the information needed to render proper advice.

    Good luck.

  98. Peter,

    I own 25% of an S-Corp and my partner owns 75%. If I receive a draw for example of $5ooo does my partner HAVE to take out $15,000, 3 times that for his draw? Or can it be less? I was under the impression that you are allowed whatever your stock basis was the year before and it could be any amount under that per owner.


  99. Peter
    Where I work, we are an S Corp. There is only one shareholder, and many times if we are low on funds he gives money to the company. It is listed as a Loan from Shareholder. When I pay him back or reimburse him, does he have to report that as income? The reason I was asking is because I thought rather than paying him his salary we could pay him back until we have paid him everything he has “lent” the company. The amount he has lent the company is sizeable, but I didn’t know if he should be paying taxes on the reimbursed amount.

  100. Karen,

    Repayments of a loan are not taxable income. Just be sure you document the repayments properly and you probably should have a Note drawn up with a reasonable interest rate just to establish that the loan is bona fide.

  101. Peter,

    I own 4.5% of an S-corp and the founder 90%. He takes what he wants throughout the year and I’m unclear on his official “salary”, thus unclear on how much profit there is at the end of the year as he will max out to reduce taxed profit or distributions. He typically zeros out the books at year end and I try to get financial statements, but am unsuccessful. How do you tell your boss that he has to have an official, fixed salary? How do you determine how much over his salary is profit and should be distributed. He set this up as a retirement vehicle for himself and I would like reassurance (by way of compensation and profit sharing) that I am benefiting from his retirement plan and ownership program. Any words of advice or resources would be greatly appreciated. Many thanks.

  102. Bobby,

    Thanks for the question.

    You don’t say what state you are from, but in Florida any 5% shareholder has a right to see the books. You might want to start by looking at your state’s corporate law.

    If he is paying himself just enough salary to zero out the profit, you have a legitimate concern because he is, thereby, making your 4.5% profits interest worthless.

    You need to confront him on this. If the numbers are big enough, I suggest you consult with a corporate lawyer in your state.

    Good luck.

  103. I received a question from a friend last night and wanted to give him the best advice for his situation. He has an S-Corp with another person. There ownership is 50/50. They are currently on an accrual basis of accounting for tax purposes. Each owner gets paid an equal Salary and the remaining money is left in the business. The S-Corp pays there tax liability on each owners personal tax return as well. The issue here is, the tax liability is lower for one of the owners, because they have more personal write-offs and filing status is MFJ v. Single. What is the best advice so that I can give to my friend, so that the distribution is even and fair among the partners.

  104. Peter,
    I am a 50% owner of an S corp and my business partner was also employed by another entity when we started. After one payroll cycle, he was laid off and started claiming unemployment benefit. Since that time he has not received any salary from the S-corp. I have taken regular salary payments since. I now wish to take a distribution but as I understand it, any distribution would have to be made to us both on a 50/50 basis – as he is unemployed, he is unable to receive any payments at all so does that mean I can not take a distribution either?
    Thank you

  105. The distributions must be proportionate to the shareholders’ interests otherwise you create a second class of stock and blow your S corporation election.

  106. Peter,

    Thank you for comprehensive answers; you provide valuable insight into S-corp issues. Please help with this one. I am buying an S-corp (all shares) from my brother who is a 100% owner. How do we report the sale to the IRS and what forms do we need to file except change of address? Will Buy/Sell agreement be the only proof of change of ownership?
    Thanks a million,

  107. Dear Peter,

    Thank you so much for helping everyone here. I read all the posts but I am still a little confused. I just opened a one person S-corp, so I am very new.

    I would like to make an example:

    If my Company profit at the end of the year before payroll is $60K, my salary for the year is $36K, I know the business income will be $24K.

    As you said in other posts before, if the business income sit in the S-corp, it WILL NOT be taxable. The only taxable part is the personal income tax from my salary, which is the $36K * 15.3%.

    Let’s say, I want to take $4K as distribution from the business income($24K), I will write myself a check as “Property distribution”. Will I be taxed on the $4k as part of my personal income tax?? And will the tax rate be the same as the salary @ 15.3%? And the rest of the $20K business income will have no effect and sitting in the company for company use?

    Thank you very much for your time & help, I really appreciate it!!!

  108. Hi Peter,

    I am trying to determine what is the best way to report distributions/draws for a S Corp? How should it be reported on financial books? And for tax purposes should the distribution be included as salary and wages line 8 or compensation of officers 7?

  109. Selina,

    Distributions are reported separately in the shareholders’ equity section of your balance sheet. They are neither wages or officer’s compensation and do not appear on your profit and loss statement at all.

    You might want to hire a good local CPA to handle your books and tax returns for you.

  110. Peter,

    Please help with this one. I am buying an S-corp (all shares) from my brother who is a 100% owner. How do we report the sale to the IRS and what forms do we need to file except change of address? Will Buy/Sell agreement be the only proof of change of ownership?
    Thanks a million,

  111. If I put $10,000 into my C-Corporation as a capital contribution, can I take it out at a later date with no tax consequence?

  112. Phil,


  113. I was told it had to be taken as a dividend. I am a new CPA and am getting different answers

  114. Does the taxable amount at the end of the tax year (for distributions) assume the business account is drawn down to $0 or is there a provision to allow some funds to be left in an operating account to cover expenses into the next calendar year without being taxed as a profit to the shareholder(s)?

  115. John,

    Profits of an S corporation are taxable to shareholders whether or not they are distributed.

  116. I am the sole owner/shareholder of a newly formed S-corp. I elected to be an S-corp primarily for the tax free distribution. How does my basis in the company affect the amount of distribution? I read that I cannot take a distribution greater than my basis in the company. So if I invest $10,000 in capital, does that mean I cannot take an annual distribution greater than $10,000? And I read your distribution reduces your basis in the corp. So after I pay myself a $10,000 distribution one time, does that mean my basis in the company is now zero?? Thank you for clearing up this matter for me because I am completely dumbfounded by this basis thing!

  117. Wendy,

    You can take distributions in excess of basis, but they are taxable. Basis determinations can be complicated and I suggest that you hire an experienced CPA or tax attorney to prepare your return and give you ongoing tax advice.

    Good luck.

  118. Hi peter, If there are two shareholders one has 70% and the other has 30%. If 70 % shareholder earns $15000 to himself but not to other shareholder what should i do to resolve this problem since this is uneven distribution”?

  119. steph,

    It is only distributions which must be equal. If the 70% shareholder earned the $15k for services he rendered as an employee and it is paid out as wages, the S corp has not violated the rules.

    If the $15k is a distribution, however, the S corporation would have to make a proportional distribution of $6k to the 30% shareholder.

  120. Hi Peter- I am a 100% shareholder in an S corp that I plan on liquidating. I owe $200,000 to the company that I cannot afford to pay back. How do I account for this. Does the corp report cancellation of debt? Or is it a distribution to me?

  121. If an S-Corp pays an outside payroll service for wages and the outside payroll service W-2’s the S-corps employees under the payroll services’ name and id#, would you still list those wages on the S-corp’s tax return as wages of payroll services?

  122. Judy,

    If you are leasing the employees from the payroll service, they are not your employees and you would not list them as your wages.

  123. Peter,
    I lost tack of how much time I have spent on reading these questions and answers. Well done. I have an S corp I started 12-2-09, and have been making estimated tax payments quarterly. My business is seasonal. I make twice as much the second half of the year. The estimated tax payments instructions dictate EQUAL quarterly payments. What if you don’t make EQUAL quarterly income?

  124. Hello,
    My husband made me President and 75% owner of his company because he said he would get a better worker’s comp tax rate or something like that. My question is, should I have been getting paid for that? I can’t recall ever being paid and I think I have been President for at least 2 years. I actually don’t do anything, I don’t attend meetings or make any kind of decisions whatsoever. Also, can bankrupty of the company effect my personal savings or retirement?? Thank you for your help

  125. If you aren’t performing the duties of a President, you should resign. And if you didn’t do any work, you shouldn’t be paid.

  126. Any more news on shareholder distributions (actually taken) getting taxed like self employment tax. I heard it’s supposed to take effect on the 2011 tax returns. Also why don’t you refer these people to Enrolled Agents? Enrolled Agents have more taxation knowledge than other tax preparers.

  127. Peter,

    Refering to post #120.
    When taking a distribution of 70/30. Shouldn’t the 30% shareholder receive $6428.50, since the distribution is being made from an unknown sum? I have a 70/30 s-corp and use 15K divided by (2.33333 factor ) when making distributions. Would this be correct?

  128. My brother in-law has an S corp that is currently suspended and wants to start an LLC with me and a friend. Other than the obvious question of why would I start a corp with a guy whos status is suspended. Can he legally start another corp while he has a currently suspended one?

  129. Hi Peter,

    First off thank you for taking the time to answer people’s questions!

    I have the following question:

    In 2008 I setup an s-corp. The corp has done very little over the past two years. Initially I loaned the corp money to get it going. The corp has earned a little and spent some money. I have never setup payroll and have not taken a distribution. By the tax filings the s-corp has lost money each year. Meanwhile, I have been employed as a W-2 employee with another company at the same time. In September 2010 I decided to leave that company and work at building the s-corp. It has been suggested to me that it might be easier to simply take money earned by the s-corp as distributions the rest of the year without taking a salary due to the potential difficulty of setting up payroll mid-quarter and year end. The justification being that since I have substantial taxes already withheld from the previous job then it won’t matter as much. I’m not quite sure how the reasonable salary clause plays out in the scenario. What are your opinions on this?

  130. Michael,

    Thanks for visiting.

    I would need to know more about how much was withheld from your wages before I could tell you whether or not to pay additional taxes in for the rest of the year. But remember, even if you take distributions rather than wages from the S corporation, you still will have to pay federal income taxes on that income. The only thing you are saving by taking distributions rather than wages are the FICA and medicare withholding taxes.

    I would prepare a pro forma 2010 tax return and make an analysis of the adequacy of your 2010 withholdings before I advised you on this.

    Good luck.

  131. Hello,
    I have a question going all the back to the beginning example of $40k in wages and $40k in distributions.

    It’s stated that there would be roughly a $6k savings due to paying less FICA taxes.

    However, isn’t salary an expense? Therefore when the salary is $80k there’s an additional $40k of expense for the business. At a 30% tax rate that would be $12k. So, while you would pay more FICA taxes with an $80k salary the personal income tax would be much less since the K-1 would be lower.

    Is this correct?

  132. Hi Peter,
    I bought shares (50%) from my partner to make me 100% owner back in 6/2/2010. She is now completely out of company. From now until the end of 2010, I will have some distributions beside my basic salary (70% wage, 30% distribution). As my understanding distributions have to be equal, 50/50 in my case. My question is do these distributions that made after 6/2/2010 still be affected by this rule on the 1120s form and shedule K-1 for this tax year. I know that next year it will be easier since I won’t have the half-year co-ownership tax confusion. Thanks and sorry for my English.

  133. My company is an S-Corp. Thanks Again.

  134. I am 1/3 owner of an S-Corp. One owner is more of an advisor with no day to day duties. He is not involved in day to day marketing,sales, etc. Myself, and another partner are in the office and market our company and run daily operation. We do not have weekly/biweekly w2 earnings. We habe one employee who is paid biweekly payroll. We instead take a payroll about once a quarter. We split the expenses 1/3 each, then split revenue as W2 earnings. The 1/3 goes to our partner who is not located in our office. (not sure if it is payrolled) for he is also 100% owner of another like company. We are going on three yrs and have yet to take a distribution or K2. (at least 2 partner can claim this)Are we foolish for not taking the tax advantage here? We utilize the “other” partners accountant for the books. Your feedback is appreciated. Thanks

  135. Hello Peter,
    Thanks for posting this blog – it is quite helpful.
    My question is regarding payroll & taxes
    I am setting up an s-corp where I am the sole employee for now. I plan on paying myself a salary…do I need to do monthly withholding for social security, medicare, etc from my own check? Or is that paid at the end of the year when I file my personal taxes?
    Does the s-corp need to pay monthly to the irs thier portion of the withholding, or again, is this done when filing taxes?


  136. Robin,

    It’s good that you’re paying yourself a salary. I recommed that you make your deposits on a monthly basis and not wait until the end of the year. Your payroll deposit will include the employer’s share of FICA and medicare.

    It might be a good idea to hire a payroll service to handle this for you.

  137. Hi Peter,

    My partner and I have been 50/50 owners in an S Corp for several years. In August, I paid him for his shares, and he legally left the company. If I do a distribution to myself in December, do I need to distribute the same amount to her (because she had a 50% share earlier in the year), or not need to distribute anything to her (because she is no longer an owner?

  138. It seems to me that S-Corp distributions are not counted as earnings for the calculation of pension contributions for defined contribution plans. To the extent that wages are reduced by contributions below the current pension compensation limit of $245,000 then pension contributions could also be reduced. This effect on compensation should be considered when the S-Corp is a group of professionals or other high wage earners. A pension plan can be written to have a high contribution percentage whereby the maximum of $49,000 is reached at an earlier wage ceiling but the entity may be forced make higher than desired contributions to other employees.

  139. Also, if wages have already exceeded the social security ceiling (unchanging at $106,800 for 3 years!) then the only savings is the 1.45% medicare tax. The distribution will not have any federal income tax withholding and whether the employee / S-corp shareholder is required to pay estimated taxes or not they will still have to cover the income. For working professionals who are still locked-in to S-corporations distributions work best as “bonuses” and not as a way to allocate a large percentage of the profit.

  140. I have a debt question…I started an S Corp with one of my friends in August, 2010 and we incurred alot of personal debt. When I decided to leave the S Corp we had verbally agreed to just pay on our own personal debt; however, she has decided to sue me for 50% of her debt. I’m a responsible for 50% of the debt? We are 50/50 shareholders, however, we did not make any profit from this business. At this point, I am still listed on the S Corp, not sure what I need to do from here?

  141. Rose,

    I need more information before I would even attempt to give you advice on this. I suggest you hire a local lawyer to help you defend the law suit. Good luck.

  142. Hi Peter,

    I own 50% of an S-Corp with my friend. We acquired this business this year. I talked to my accountant and she indicated that we can “accelerate” the depreciation on our fixed asset to offset the net income. We currently have a net income from the S-Corp of $20k. If we decide to accelerate the depreciation on the fixed asset, the S-Corp will have $0 in net income. 1) Can you actually do that? 2) If so, can we distribute the cash in our checking account? From what i understand, any distribution would lower my basis of the company, correct? If that’s possible will we be tax on the distributions? Please advise.

    Thank You.

  143. Ken,

    I assume your accountant is referring to what is known as a 179 expense write-off for new capital purchases. If so, it sounds right since 20k is well under the maximum allowed for such write offs.

    You will only have a tax problem if you take distributions in excess of your basis. Your preparer should be keeping track of your basis.

    Good luck.

  144. Peter,

    Thanks for all of the great information. Here is my question:
    Where on my K-1 is my profit distribution reported? I need to be able to document my income for mortgage purposes. The mortgage company has correctly indicated that just because there is taxable income on my Schedule E it doesn’t mean that I’ve actually received the profit.
    Thanks for your time.

  145. Peter thank you for all of this valuable information. twenty year ago I inherited 24 %of my deceaced fathers business. 4 % was given to my oldest brother giving him the control of the corperation with now 52 %.The other 24 % was given to my younger brother..As today we are still a C-corp and now my older brother wants to change it to a S-corp.we all work at the business and built it to be a very sucessful and profitable orginization.Being that I have no investment in the business other than sweat equity how will this efect my taxation and what other advise can you give me in regaurds to a stockolders agreement.

  146. Elaine Wagner says:

    How does one determine how much to pay in any given fiscal year an S-Corp.Employee/Shareholder for payroll and distribution under your example no. 2?
    Why can’t the Employee/Shareholder take only distributions and thus avoid the fica p/r taxes?

  147. Elaine,

    The determination is subjective. No set formula. And the reason you can’t just take shareholder distributions if you are a working shareholder is because some portion of the payments made to you must be for your services. At least that’s the way the IRS looks at it.

    It comes under the substance over form doctrine.

  148. We have an S Corp from inception and this is our first year in business. The ownership is 49/51. The shareholder with 51% ownership gets wages but the 49% shareholder only gets distributions. I undestand that the distributions are based on the percentage of ownership which is based on the actual investments made by each shareholder as of the end of the accounting period. However, how is the amount of distributions computed when the wages of one of the shareholders is already included in the net income calculation which will be used to compute the amount of the distributions? It seems that the shareholder with 51% ownership is getting more than 51% percent as he is getting a salary and 51% of the net income.

  149. Brad,

    Thanks for your question. First, you are right that distributions must be made equally based on percentage of ownership, but wrong that it has anything to do with the actual investments made by the shareholders. Second, wages do not have to be equal. They are (supposed to be) based on the value of the services provided by the shareholder/employee and have nothing to do with return on investment. You need to restructure the entire compensation arrangement.

  150. Thanks Peter!

  151. Peter, the distributions are made based on the investments balances as of the end of the period, correct?

  152. Brad,

    No. Distributions must be made based on the percentage of stock owned by the shareholders. If you own 51 percent and he owns 49 percent and you distribute 100k, you get 51k and he gets 49k.

  153. Peter, I started the company (LLC with tax status S Corp) with $100k after tax money from my personal savings. My business is not paying me interest or have a formal loan, but when I take money out I account it aginst the opening balance “Loan” I made to seed the business, not as a distribution. Have I screwed up?

  154. Paul,

    No. You’re okay. But you should reclassify the 100k you lent to the company as a loan so it’s reflected that way on your balance sheet.

  155. Hi all, Just a quick Question. I have a S-Corp I started in 2010. Revenue was very small, I am the only Officer (100% shareholder). We only did 3 small jobs and most all the revenue was put directly back into building up our supplies, equipment, tools, etc etc. I took no wages, and only drew about $210.00 for myself through 2010. There is no logic in W-2’ing myself as the company balance is only $40.00 right now….. Im not a vendor either so 1099 is not right either. If I claim my $210 disbursement only I dont see a problem with the $ being so low, but should I expect an IRS audit anyway? (not much in the way of complicated financials here , so im not really too worried, but I want to know what my best option is) Thanks!

  156. I have the same question as Ryan from #43 post. I could not find an answer to his question. I own 51% of a S corp and want to take out profits (that have been already been claimed and taxes have also been paid on my personal income tax returns) but the “real dollars” have never paid out. They have accumulated over the years and are profit I now want to take. How do I account for that in my financials? Thanks…love your website!

  157. Hello there and thank you for all of your valuable answers. I own an S corp and pay myself a weekly salary to cover the work that I do. I just printed of my W-9 and ran my Shareholder Distribution Report for my accountant. I paid myself $13,290 in wages and $22,285 in Distributions. That is a vast difference (not intentional but my business is based on sales so the more we orders we have, the more I made so it was difficult to come up with a weekly salary). My question is 2 fold: First is that too big a discrepancy? Secondly, at what rate are distributions taxed? Any help you can give would be greatly appreciated.

  158. Hi Sherry,

    There is no formula to determine what the proportion of wages to total compensation must be. Because the numbers aren’t that large I doubt you will have a problem, but you might want to take 50% wages and 50% distributions in 2011 just to be safe.

    Distributions are generally taxed at ordinary income rates. Distributions in excess of basis are taxed at capital gains rates.

    Good luck.

  159. hilda dempsey says:

    Thanks for the great advise. I have the same question as 107. I bought the shares from my 50% partner of the S Corp. How do I report this on the 1120 S? Do I issue my partner a 1099 B for the stock? I am now 100% owner and want to do the taxes for the S Corp. The Corp did not have enough money to pay for the 50% shares, so I payed him out from my personal savings account. Do I report this as a loan to the S Corp.? Thanks.

  160. Anyone, what percentage ( “S” corp) disribution for a doctor seems reasonable? Thanks.

  161. Peter,

    If an S-corp makes profit, but does not make distributions, are FICA taxes still due? I understand that INCOME tax should be paid by the shareholders, and you mentioned that several times, but I am not certain if FICA taxes should also be paid or not.

    My situation is that I own 100% of an S-Corp, which has made about $60k in profit last year, but never made any distributions. I am living off my savings, and I an even paying the income tax on S-Corp profits from my savings as well.

    Now I am worried if I owe FICA taxes, and if it’s too late to do anything about it?


  162. My question on distribution shows that I know nothing. I get it now, the distribution is recapturing your investment, right?

  163. A new client has been doing business as an S corp and the former accountant for years took all salary deductions as a “bonus”on line 19 misc expenses.

    The bonuses were about 50% of NI before bonuses. The individual reported the “bonus” on a schedule C item and paid the self employment taxes.

    How do I fix the various problems associated with this “short cut”. IE no pr taxes w/h, no pr tax reporting etc.

    PS great site

  164. part of my s corp sales is paid with paypal which I have used for personal as well as business expenses. Can the personal use be treated as a distribution? I am a 100% shareholder and file a k-1 for the profits every year.

  165. If there are wages paid to the investor/employee, the business is profitable and has been for years, is it required to take a distribution, or does it just make sense to do so?
    For what reason would you NOT take a distribution?

  166. You are not required to take a distribution because you are taxed on it whether or not you take it.

    Usually, S corporations distribute at least enough to cover the shareholder’s taxes on his share of S corporation profits.

  167. Peter,
    You are great! I have learned a lot from the site. But I do have an important question and notice that some people that have asked them have not been answered. I did not make my quarterly payments because I don’t make money all at once and it comes in spurts mostly at the end of the year. I need to know can I pay myself a wage bonus at the end of the year and do the fica taxes at that time since I did not pay quarterly and if so, will I be penalized? Please let me know.
    Thank you

  168. Janet,

    Thanks for the kind words.

    If you made the money all in the last quarter of the year, you don’t have to make the estimated payment on that money until January 15 of the following year.

  169. Peter,
    Thank you for your quick response. Can I just submit a w2 without any Fica taxes taken out? Also, one more questions, do you think its worth keeping the S Corporation open with the following
    $48K minus deductions for business expense $39K. Leaving $9K left with $5K going out for wages and the rest in distribution. This is my 2nd year as a S Corp and the first year I only distributed $500 to each officer (distribution). I am just thinking it is not worth holding on to the S Corp. I sell Real Estate and related services and the market is very slow and I don’t see it getting better anytime soon. What are your thoughts?

  170. Janet,

    You have to withhold the FICA taxes.

    If you are going to continue your business, I would keep the S corporation. It’s better to report your business operations there than on a Schedule C attached to your 1040.

  171. Peter, can you tell me how I can pay the 2010 wages now. I did not pay them in 2010. Is there a special form where I can use and figure out the late penalty fees?
    Thanks again!

  172. Peter,

    I used my distributions (in excess of my wages w/Fica) to pay my husband for his stock in our S Corp. The distributions and wages are all on our 1120S, but I am running into difficulty with Schedule D for his Capital Gains. First, how do I list his method of acquisition when he is the one who issued the stock to himself upon startup of the SCorp in 1996. (Is that still considered a “stock purchase”?) Second, on our joint return we are now being taxed on the Distributions as income AND on the Capital Gains he must claim for stock sale. Is there any way to avoid the 28% Capital Gain taxation? We know that “gifting the stock” would have had no tax consequence, but wanted an arm’s length transaction due to some toxic rental properties that he owns solely in his name and is going through Short Sale negotiations on. I have been running the S Corp for two years and we thought that it was time that the stock certificates were legally in my name rather than his. Our lawyer helped with the Corp minutes and Stock Ledger so that all is above-board witht the Stock Purchase on 1/2/2010.

  173. Hi Phyllis,

    Your husband will have to recognize a capital gain on the difference between his basis in the stock (did he contribute moneys to the business at the time of start up?) and the purchase price you are paying him. Nothing else matters.

  174. Thank you very much for such a prompt response. I had figured the same as what you have said, and will now just figure out the Schedule D instructions. We had figured the Capital Gains at 15% and are finding it to be 28% (ouch) instead.

    You provide a wonderful service to the S Corp community. God bless.


  175. Peter,
    I have the same issue as Joseph in post 164. Because the 50/50 employee-shareholders didn’t take salary the first year, the CPA reported 1/2 the profits as “contract labor” on the Schedule C and paid S/E tax. 50/50 Distributions were taken & the other half of the profits were reported on Sch. E / ordinary income 50/50. Now I am the new CPA for the S-Corp’s second year and they again have reported no salary. I feel as if my only solution is to do the same thing for this year with income on Sch. C and advise salary for next year. Please advise ASAP – I have a meeting tomorrow with this client. Thx & great site!

  176. Peter, I have two areas of concern.

    1. I did not think S Corp’s had to pay quarterly taxes. Are the quarterly’s only for companies that know they will have a large profit at the end-of-the-year and they want to even out the payment?

    2. I am the only owner/shareholder of an S-Corp. It is a small business ($15,000 yearly income) and generally passes through as a loss to my personal taxesdue to the deductions. I do not pay myself a salary because the money just is not there to justify it. However, at the end of the year, is it ok to pay myself back on loans I made to the company ($900)? Also, if there is any money left at the end of the year, is it ok to take as a shareholder distribution($900)?

    Thank you.

  177. i’m 50% owner of an s corporation, my partner has taken more than 50K in distributions above and beyond his salary for 2010. Aren’t distributions supposed to be equal? And what if the company didn’t make and profit in 2010, but the one partner took distributions anyway?

  178. i am 25% owner of a s corp in another state. The day to day operations done by the majority owner. I am having a very hard time getting him to pay me so i can pay the tax on the income i have to report. I did not receive any income, but owe tax on the income. He of course takes a salary so has income to go with the tax he owes Is there any legal options open to me if he will not pay.

  179. small s-corp, I am taking $30,000 in W-2 wages rest is distributed thru K-1 , $93.000 to my wife and $65,000 to myself.What is maximum we can contribute to SEP? Is it based on W-2 salary or we can include K-1 as compensation as well?Thanks

  180. Hi Peter,
    I am thinking about starting an S-Corp, but am having difficulty getting my head around the taxation issue. In your original example, you said that the shareholder saves $6,120 in Fica taxes. However, if the rest of the $40,000 is passed through to him as a shareholder (whether or not is is distributed), and if that $40,000 is subject to “ordinary” taxes (I’m taking that to mean regular income taxes, am I wrong?), then in that tax bracket he owes 25% on that $40,000, which equals $10,000, and is definitely not a savings. Where am I going wrong here? Please explain. Thanks.

  181. Vivian,

    Thanks for visiting.

    The shareholder has to pay tax at ordinary rates regardless of whether her income is paid as compensation or a shareholder distribution. In other words, if the 40k in your example was paid as wages you would still have the 10k income tax debt but you would have also had to pay employment taxes at the corporate level on that amount. The distribution is better because it is not considered self-employment income and, therefore, escapes the 15.3% self-employment tax.

    Hope this helps.

  182. Peter

    Just a few observations, comments and one question. First you need to be applauded for your dedication to this blog. I have work to do but could not pull myself away from this blog until I had read every single post. (I’m an anal engineer.) Reading between the lines it was chuck full of emotions from anger, fear, confusion, enthusiasm, excitement etc. I would offer this advise – as you have repeatedly – on the benefit hiring a competent CPA or bookkeeper . When I started my company I was fortunate enough to have sufficient income to afford a CPA, and, as painful as it was to spend that kind of money on him the first couple of years, your blog made me realize how important is was to get off on the right footing . To save costs I did my own accounting in Quickbooks and provided him an accountant’s copy each quarter which he looked over and made any corrections/adjustment to my accounts and he prepared and filed any taxes owed. I learned a lot from him and assumed all responsibility after about a year. Granted, I place a lot of faith in Quickbooks and Turbotax each year but I no longer have any significant fear in doing my own taxes and accounting. That leads me to my question (finally). For a new start-up company where funds are extremely limited, would it not be better to start out as a sole proprietorship (other than liability issues) until the company gains enough traction to afford the initial learning curve for a corp.? Keep-up the good work!

  183. davend prasad says:

    do all members have to sign for s-corp bank account.if so, what if s- corp already has this bank accout without all members names

  184. davend,

    I don’t understand the question.

  185. Ilan Cohen says:

    Hi Peter,

    After reading the entire blog, I am still struggling with my issue. I opened a s corp in 2009 and I had a loss in the first year which was transferred to my personal tax return. In 2010 I finally had some profit, but I didn’t take any salaries because I didn’t know what is going to happen in the end of the year. What would I do in order to do the right thing.

    Thank you, Ilan

  186. Peter, I am buying a small S corp, but the current owner does not want to simply sell me his shares, which would allow me to continue with the same corporation name and Tax ID number. Instead, he wants a total break in ownership at the time of the sale. Therefore, I am establishing a new S corp. In this case, what should our contract specify that I am buying? Will I be personally buying his shares and somehow transferring them to the new S corp? If so, how do I legally transfer them? Or will the contract specify that I am buying all assets of the current owner’s S corp, without reference to the shares? I very much appreciate whatever information you can provide regarding this issue, including anything about which you think I have failed to ask. (I just discovered your blog through Google. Your answers are well written and obviously helpful to many people.)

  187. Ilan,

    You must report your share of S Corporation profits on your 1040 whether or not they were distributed. If performed services for the S Corp, some of those distributions probably should have been reclassified to w-2 compensation.

  188. Elizabeth says:

    If a federal and NYS S Corporation has to pay NYC corporate tax, shouldn’t the S shareholder be able to exclude the S income from taxable income from NYC purposes? I belive this is the case, but I can’t figure out mechanically how to do it – Nowhere on the NYS form that I see to adjust between NYS and NYC taxable income – Is there are supplementary form?

  189. Peter,
    This year we are doing our S Corp taxes at the last minute. Turbo tax. We distributed salary and also dividends based on estimated income from real estate sales that did not materalize. Now it seems we have a loss in the S corp. Is that ok? Earnings are $30K and expenses are $33K. Your thoughts?

  190. Deb,

    If it’s right, it’s okay. Some businesses incur losses.

    I recommend that in the future you hire a qualified tax preparer to help you do tax planning and prepare your tax returns, especially if you expect the business to grow.

  191. Peter,
    I am a 11.1% shareholder, with no basis, in an S-Corp. In 2008 my share of the K-1 stated corporate profits was $275k which along with my salary gave me a tax burden of aprroximately $96k. Not being able to pay this amount the corportaion “distributed” to me (typically no distributions are paid to me) in 2009 the $96k amount to pay the IRS. Question – was this income for me that should have been reported in 2009?

  192. I need some help….. This year, I elected to file as an S-Corp (I was previously running as a proprietorship). Over the course of the year I made all kinds of installment payments personally, so my FICA and taxes are covered.

    Here is the problem. If I understand correctly, I should have taken a wage and taken regular deductions. I then should have issued a W2 for my “pay”. There is 130,000. in profit. I would like to split that 50/50 between wages and distributions. But as of today, there is no W2. Is there some way I can report for 2010 and pay all the SE taxes on the salary … or do I need to go back and file a very late W2 and pay the penalties?

    Hope that all made sense. Any thoughts?

  193. Question?

    I am 50% shareholder of a s corporation and my partner has recently stated that she wants out. I put up all the financials to start the business. Overall, I am at a complete loss. What do I do?

  194. I am reading this with much interest. My husband and I are 50/50 owners of a S Corporation. My husband receives a salary and takes distributions. I am not getting a distribution and he says this is because I am not working in the company. I was extremely active in our business activities until I had health problems. Even though the corporation papers state that I own 50% and also the VP and Secretary of the corporation, but on the tax returns he is listed as the only stockholder. He stated that he thought the accountants had made some assumptions. There are many personal reasons for my concerns on this matter. I would greatly appreciate any feedback.

  195. Peter,

    I have a question. I have a S-CORP from which I made $2900 for the whole year. I have taken the whole amount as distribution and reported on my personal taxes and files a zero with IRS? Should I be filing a k-1 also?

  196. Hi Peter,

    S-corp shareholder takes distributions in excess of stock basis—-I’m reporting them as capital gains on Sch D with no basis–but are they taxed as ST or LT capital gains? What is the criteria which decides whether excess distributions are taxed as ST or LT? Code section?


  197. Kevin W. says:

    I am 70% owner/operator sole producer of an S-Corp service business. My 30% shareholder has never contributed beyond his share purchase. He did loan start-up money, which has been repaid at 10% interest. We incorporated in 2005 and I built the business to gross receipts of over $300K annually. I travel away from home 40 weeks of the year to service accounts and typically work 50-70 hours a week. Last year I paid him distributions that equal 30% of profits since incorporation, as calculated by our CPA, equaling nearly half of his initial investment. My goal and intent to to provide him with at least 10% ROI. Is this reasonable? I need to keep myself beyond reproach.

  198. My husband, my brother, and I just started an s corp. We do the adm work and an independent contractor does the service work. (lawn care). We use one room in our home for the office and use our car for local business trips. It does not look like we will be profitable yet. My brother told us the S corp can use 1099 MIS to pay us for our office expenses and car expenses and we would not take wages. Is this the correct way to handle this until the s corp becomes profitable?

  199. I have inherited shares in a s type corp. and am
    being taxed on undistributed profit. No shareholders agreement that I am aware of. Do I have any recourse ? The other two shareholders are very hostile towards me. They now plan on issuing two thousand shares of stock. Currently there are 100 shares-I have 33.3. Why the issue of add. stock? Could that make my position weaker? Help me if you can. Thank you

  200. I have owned 49% of an S corp since 2009 however have never received any salary or distributions yet the 51% partner has received salary along with a $30,000 distribution in 2009. In reading information about S corps it appears I should have received a salary & a distribution commiserate with the $30K my partner took for his 51% ownership. It seems we may be in trouble with the IRS. Any suggestions on how we may be able to rectify this and satisy the IRS?

  201. I have a twist on this issue. I own a significant % of a S corp (CA) and live in NH. Distributions are taxed by CA as CA source income and then NH taxes them again as dividens. I prefer to take all profits as w2. At what point can CA say my W2 is to high and I must take some of it as distribution? Any direction would be appreciated. The two CPA’s I have paid have been unable to answer this for me.

  202. Peter, your tax savings is incorrect. Although you save on FICA by taking draws, your personal income tax is greater since the net income from the business is higher…resulting in a lower net tax savings.


  203. Derek,

    Thanks. I will check it out and make the correction.

  204. Hi Peter,

    Thanks for posting this article. I have a quick question. I recently formed an LLC and am setting up my EIN and I want to know whether I should classify as a partnership (2 people involved), which is the default, or seek S-Corp status. I don’t know whether the business will show a profit and therefore I’m unable to anticipate a reasonable salary. I would prefer S-Corp status for if/when the business turns a profit and can take advantage of the distribution tax savings.

    Is it correct that if there are no profits that we would not be expected to pay ourselves a salary (and especially not every 2 weeks) and only if there is a profit then we should just classify a reasonable amount as W-2 income?

    Or should we classify as a partnership and then change to S-Corp once the business becomes profitable?

    Thanks for your help.


  205. Jaren,

    Sounds like you know what you are doing. I prefer an LLC filed on a S Corporation return to a partnership.

    You are correct about the wage vs distribution issue. If you aren’t taking any compensation at all, there is no issue. Once the corporation starts making profits before shareholder salaries and distributions, then you need to make sure you are paying yourselves a reasonable wage.

    I hope this helped.

  206. Hi Peter-

    This blog is really great, thank you so much!

    Quick question from my husband – he has an S Corp with 100% ownership generating 200K+ a year which he reports all as wages. The S Corp will now generate extra 50k – would it really matter if he takes this unusual profit as a bonus vs. distribution if he has already exceeded the FICA threshold of 104K?

  207. Hi Peter,

    Thank you for your post, it’s helping me navigate the S-Corp minefield, although I’m still trying to get my head around things.

    I own 100% of an S-Corp. For 2009 I recorded 100% of my Income on employers federal tax return 941 (box 2 wages tips and other compensation) and W2 box 1. From this 100% i attributed 10% as distribution and recorded this on form 1120s, and recorded SS and MC taxable wages at 90%. Did I record this correctly? Or should I be recording distribution somewhere else? I am also slightly concerned that an audit flag could be raised as my total salary and compensation amount on the 941 form does not match the taxable salary for MC and SS, and there is no where to record distribution on 941?

    Your example shows how to reduce federal withholding by recording distribution on schedule E – But am I correct in thinking for 100% shareholders such as myself there is no benefit to doing this as the amount saved will be accounted for anyway on my personal? Also, am I not leaving myself susceptible to penalties for deliberately reducing withholding?

    Finally, my last account advised me (wrongly I think) that I can not allocate distributions as they need to be based on business profits from previous year?

    I’ve had 3 different accountants in the last 3 years and neither seemed to know the finer points of taxing S-Corps so am now doing my own taxes, so your advice is greatly appreciated.

  208. My husband and I are 50% shareholders in our S Corporation. What if the company has net loss for the month – will it be okay not to pay us (as officers) a salary? We pay our employees on a bi-weekly basis and tax deposits are paid to IRS & EDD the following Wednesday. Do we as officers be deducted (tax) on a bi-weekly basis, too or quarterly? Please advise. Thank you.

  209. Chris,

    There is a savings even to 100% shareholders because the amount paid as a distribution is not subject to employment taxes. You will save 15.3% of your distribution amount.

  210. Hi Peter,

    Do I need to record distribution on Schedule E, or can I record on the 941 form instead?

  211. Chris,

    It goes on Schedule E.

  212. Hi Peter,

    Am I correct in thinking it will also need to be reported on 1120s form in Schedule K?


  213. I have a partner and we both are 50% equal shareholders. I am a silent owner so he is getting $4000 in wages and I am getting $2000 per month. Do I need to report $2000 and 50% of the net income from my k-1 on my individual taxes?

  214. I am a minority owner of an S corp. I ran the company as President and drew a salary. The majority owner never took a salary although he made every major decision and directed the company as a CEO. Now I have been put on administrative leave, banned from the facility and receive no salary or distributions. The company is very profitable but I am not given money to pay estimated taxes. Question: Is the majority owner liable for wrongdoing by not taking a salary? He is wealthy and doesnt need it. If the majority owner doewn’t take distributions, how am I supposed to get money to make the quarterly estimates? How do I get money out of the company that I have left in as retained earnings? I have paid all the taxes on a K-1 every year.

  215. how do I increase my basis if I do not have any more money to put in my S corp. I have losses and I cant take them due to basis limitations

  216. chris,

    One way is not to rely on advice you get online.

    I recommend you hire a CPA or tax attorney to do your tax planning for you.

  217. I have a client that is in an S corporation that started in 2010. each are 50% shareholders. the spouse of one of the shareholders loaned the business money for the start up to a tune of 20k. No other investments were made in the company. the first year the business had a 12k loss. my question is would the 20k be considered an increase in basis for the one shareholder ( whose spouse invested the money?) or would this S corporation have a negative basis at the end of 2010??

  218. Peter,

    Thank you for the blog and swift responses to your readers questions. I have a Question on contributions and distributions. Can losses in an s-corp only be deducted against bases, or can I deduct losses on my personal income outside of the s-corp?

  219. Hi Wes,

    Thanks for visiting. You must have basis in order to deduct S corporation losses.

  220. Peter,

    I am on a s-corp that currently has three partners which has ownership of 70%/15%/15% , now the 70% owner takes no salary and no distribution essentially they are a angel investor(they dont want in compensation) if i as 15% owner what to now take a distribution which i am paid salary and do all the operations. Is the 70% owner forced to take a distribution and if so does all three of the distributions have to be at the same time?


  221. Chuck,

    Hire yourself a good tax advisor. Never rely on the advice of a blogger who hasn’t examined your books and records and previous returns.

    Having said that, you have to pay distributions in accordance with percentage of ownership. The timing of the payment of those distributions is not important, the fact of the distribution (record it properly on your books and records and tax return) is.

  222. Hi –
    I pay myself a monthly salary as the sole employee of my corporation. At year end I will have a “extra” revenue in my corporation. Should I pay myself a bonus via payroll? Or make a shareholder distribution? If the latter — what forms do I need to use?

  223. Maia,

    I would need a lot more information before I would be able to advise you on that. I recommend you hire a qualified tax preparer to prepare your returns for you. Or at least hire one to bounce questions like these off of.

  224. Peter,

    Ok so what if the 70% doesnt have a salary, and i the 15% owner do and i want to take a 4 distributions throughout a year? When does the 70% owner have to take there 70% distribution and what if the money is not there because the 70% is a hefty amount?

  225. Chuck,

    You need to hire someone. Compensation for services rendered does not have to be equal. Only distributions.

  226. Thank you Peter.

  227. Peter:

    I am 100% owner of an S-Corp with 4 employees. I have always treated my own compensation as wages to avoid any question about the reasonable salary matter. I am two years away from sending my 1st ( of three) kids to college and am trying to strategize a bit relative to reporting income. I’d like to minimize my reportable compensation to the extent legal and practical. Of course I can reduce wages, but the balance just lands on the K1, so no help there. I know I can put up to 25% of my salary into my SEP, but beyond that – are there any other legitimate opportunities to reduce S corp net income that don’t flow through my tax return? With thanks,

  228. Stef,

    There’s a lot of things you can do. I recommend you hire a qualified tax attorney or CPA to help you with your tax planning.

  229. Thank you for all your great advice. I spent a couple hours reading all the information in these comments.

    I am a shareholder of a company that is currently a corporation. They sent all the shareholders a form 2553 to give consent to convert to an S Corp. All they said was here is a form we need you to sign…no other explanation. I’ve been researching what that means for me and it seem like it will not be in my best interest.

    Some background…I received the shares when they purchased a product/service I created. I received some cash and some shares. They also brought me on as an employee at that time for a couple years but then I was layed off. Now I just have the shares. I have received some dividends (not much couple hundered here and there), but haven’t recieved anything for over a year. I know they are having problems and have been down sizing. The main shareholders are all related and take month long vacations, etc. I realize they are trying to save taxes, but I don’t get any profits from the company and don’t want to have to pay taxes on income I don’t receive. I have a lot of shares, but as a percentage I am pretty small compared to all their family members.

    What questions should I ask them to make sure this is a good thing for me. Also, what happens if I refuse to give consent? Can they go around me somehow or will they have to buy me out?

    Thank you,

  230. My husband is a 100% shareholder in an OH S corp but we live in PA. OH just audited our taxes for the last 4 years and said we owe back taxes for distributions under ORC 5733.40(A)(7) that basically requires above 20% owners to apportion income including wages paid by the entity. My accountant told us the fix was to get a credit from PA for the taxes paid to them and he filed amended returns. PA just denied the refund saying because we are not a PA S corp we can’t get out of state credit on compensation??? Is this right or have we just somehow reported things wrong? I t can’t be that we have to pay taxes to both states on this same income can it?

  231. Wow, super helpful blog!! Thank you so much!

    I have a question. If a sole 100% owner of a S-Corp. buys stock/bonds thru the S-Corp. and then sells it for a loss, can he/she deduct the loss on his/her personal taxes?

  232. The loss passes through to the shareholder and is deductible to the extent of capital gains. If there are no capital gains, the shareholder can only deduct $ 3,000 per year. But consult a tax advisor. There may be some tax planning you can do.

  233. Peter,

    I have really enjoyed and benefitted from this post and thread. Thank you.

    I am a 50% shareholder of an S-corp in Oregon, where myself and the other 50% holder both work (tirelessly!) as salaried employees. We have 4 other employees. The problem we are facing is extremely fast growth. My questions:

    1. Can shareholder employee’s make a smaller salary than a non-shareholder employee?

    2. Do shareholder employees have to take a monthly amount as a salary? For instance, if my books show a monthly standard amount over 12 months, could I have certain months be salary and certain months be re-payment of initial investment or even distribution, etc.?

    3. I have taken a small monthly salary, but because of rapid growth, am in a position to take a sizable distribution. If I take a large distribution it will be un-proportionate to my salary. Can I go back over this year and re-appropriate “what” my draws are categorized as?

    Thank you so much.

  234. Thanks so much, this site is Great!

    I am doing the bookkeeping for an S Corp with one owner. The owner takes money out of the corporation and invests it with e-trade and later puts the money and profits back into the company. How do I deal with these transactions? and is some if it considered Income?

  235. Hello –

    I have a question about an S-corp and paying wages and distributions. The company is small enough now where it only can pay the owner 2000 per month. This amount grows each month by about $125. However a fair salary for this work being done is 30,000 per year. Is it more appropriate to pay 100% as wages until the 30,000 per year is met? Or it is fair to pay 60% of 2000 as wages and 40% as distributions?

  236. I an a 50-50 owner, shareholder and a member of the board of directors, can my partner hire or fire at will?

  237. Peter my company did well this year probably around $550,000 to $600,000 in profit and thats after my wages.I have already paid myself wages of $220,000. Should have split the $220,000 50 – 50 or should i just do a distribution for about $200,000 of the remaining $550,000-$600,000Can i go back and do the split on the $220,000 since the company havnt file returns for 2011 but the taxes has been sent to the IRS.Im the only share holder and officer in the company which is an S-Corp

  238. Andre,

    Sounds like you can afford a full-time tax advisor. The right one can save you some serious bucks.

  239. I have a small (very small) s corp as the family business.
    We are three share holders. At
    the end of the year (after expenses) there was about $1700 left. We took no salary. For this small amount can it all be given out as distribution, or do we have to give salary too. It seems too much of a hassle to set up payroll for that amount. Please advise. Thank you

  240. Hello Peter, thanks so much for all the valuable insight provided on these posts. I incorporated my business in April 2011. Finally, received confirmation from the IRS that they approved my status as S corp tax structure in November. My question is how do I handle my taxes for the first 4 months of 2011…do I just treat myself as self employed and take use a 13 of my 1099 payments

  241. Hi Peter I just have a quick question. When you say that the distribution is not subject to FICA, but only subject to a regular income tax, are you referring to state income tax? I’d like to know what tax the distribution is subject to because in Washington State we have no state income tax. Thanks!

  242. State and federal income tax.

  243. Hi Peter,

    Thanks for answering questions for the last couple years. I’m sure all of us are extremely grateful; I know I am!

    I am winding down my (single member) S-corp and have a question regarding the return of my initial investment. I think I could write the question very concisely, but just for clarity, I’ll provide a concrete (dummy) scenario. Hopefully it won’t take too much of your time.

    I distributed, say, $100,000 at closing, of which $60,000 was business income from this year, $30,000 was business income from previous years (which was, of course, previously taxed on my personal tax returns), and $10,000 was my initial investment. My basis was $100,000. (Obviously all of these numbers are after paying wages and associated taxes, providing W-2s, etc.)

    My reading is that on schedule K (and K1), I list the $60,000 business income and the $100,000 distribution. On my Schedule E, I list the $60,000 business income. And the $30,000 previously appeared on prior years’ Schedule E.

    Does the $10,000 go anywhere?

    Clearly the $10,000 is not taxed. If the distribution had exceeded my basis, then I understand that the excess would be a capital gain on my Schedule D. But since it was an exact return of my investment, do I even need to mention it anywhere?

    Thanks so much for any input you can provide!

  244. Hi Peter,
    I have an S Corp with myself as a sole owner and employee. My company made $120,000 last year:
    – My expenses came up to $75,000 (due to traveling, etc).
    – Payroll/wages of $15,000.
    – And the rest in shareholder distribution or net company profit (about $30,000).

    Does that sound like I should have ran more payrolls? Is it too little payroll/wages amount?

    Thanks in advance.

  245. Basil,

    There is no fixed formula. Do you have any employees? If it’s just you, you might have a problem if you get audited, but I don’t think the numbers are big enough to trigger an audit (assuming there is nothing excessive in your deductions).

    I have found that a 50/50 split between wages and distributions is reasonable in most cases.

  246. Great blog, I have just sucked away a good chunk of my day reading all 247 of them and was able to learn a lot! Thanks for taking the time. I think all my questions were answered but I have bookmarked your page to come back to!

  247. Hi Peter,

    Me and another partner have started a consulting services business that provides technology and business consulting for mid-size businesses. I am located in Minnesota and my partner is located in Wisconsin. We have registered it as an LLC in MN and foreign LLC in WI. Our business has operating expenses that can range from 10-30% depending on technologies we may have to lease/buy for projects and if we have to hire 3rd party resources to execute a portion of the work. We have plans of making $400,000 in the first year as revenue but we are not sure of how much our expenses are going to be. Also we would like to have some decent wage. We are planning on paying ourself $65000-$70000 as the annual salary(Salary.com data)

    IRS classified as partnership when we requested an EIN. But we have been suggested to convert as an S-Corp by our accountants. The accountant actually provided two options but recommended S-Corp. The two options are

    1. Stay as partnership and setup guaranteed payments equal to the wage amount. Take the rest as profit shared by two partners after expenses at the end of the year. We were told that we will have the flexibility to split the profit depending on a formula rather than the 50/50 capital contribution. By doing this, it seems we will save some money on self-employment taxes.

    2. Convert to S-Corp and pay salaries based on an hourly rate and hours worked by me and my partner. At the end of the year take out the profits as a distribution 50/50. Our accountants suggested with an S-Corp we lose the flexibility of sharing the profits at a variable rate but we can still save some self-employment taxes.

    What do you recommend? Is our accountant accurate or do you guys any inaccuracies in both the options. Thanks for your time and I look forward to advice.


  248. First of Peter, kudos to you for keeping this comment section running. This has to be one of the longest in web history (so much that I couldn’t keep reading them all)!

    I have 2 questions:

    1) If no distributions are paid and Net Income remains in the business for at least a year, can the S Corp pay the taxes for the shareholder by stroking a check and eliminating the cost burden on the shareholder (versus the shareholder having to pay from pocket)?

    2) In 2012, have the tax rates changed for FICA, Medicaire, and Social Security on an S-Corp?


  249. Michael C,

    Thanks for visiting.

    I assume you know that S corporation profits are includible in the Shareholders’ adjusted gross income whether distributed or not.

    If the S corporation has the cash to pay the taxes for the shareholders, it has the cash to make a distribution to those shareholders in the same amount so they can meet their tax obligations themselves. Distribute the cash rather than have the S corporation make the tax payments directly.

    S corporations and their employees pay employment taxes at the same rate as everyone else.

  250. Peter,

    I’m a minority owner of an S corp. (10%/90%) in the state of Virginia. The business incurred a loss this past year. Can we split the loss 50/50 or does it have to be split in proportion to ownership? Majority owner agrees on an even split.


    Jose B

  251. Jose,

    Thanks for visiting.

    The losses must be split based on ownership percentage. If you don’t, you will blow your S election.

  252. Rong Nguyen says:

    I live in Florida and receive profit quarterly from S-Corp in Nevada.
    Last year (2010 tax), I received $10k, I totally forgot to file tax on it.
    This year, I received $12k, how can I file the tax? what form? Any deductions that I can deduct? Do I need to file an amended tax?

  253. Rong Nguyen says:

    Oh, another question. At year end, I don’t receive any form showing how much I received like 1099 or so… should I be receive any form from the s-corp? Sorry, I am new to US and tax is complicate.

  254. Peter,
    My situation is very similar to your example, I am the one shareholder and provide services for the company. I did really well the first year but didn’t do any payroll or distributions as I didn’t have an immediate need for the money; the net was passed to my individual taxes which were paid (2010). I now have a good sum of money sitting in the business account that I’m not sure how to get at, since I paid taxes on my individual taxes the first year, do I take a distribution? Do I have to pay me wages and get taxed all over again?


  255. Stephen,

    You have to pay taxes on the net profits whether or not you make a distribution. You need to start paying yourself a salary since you are providing services too the company. I would need a lot more information to determine what a reasonable salary would be. For instance, do you have other employees? Do they generate revenue from their services? Etc.

  256. Understood, I’ve figured out a reasonable salary and am paying a salary this year. What is a reasonable distribution? A percentage of the salary or of net profit?

  257. Stephen,

    There is no formula. If you have no other revenue producers, you’ll have a hard time justifying even a small amount of distributions. But, then again, you are unlikely to be audited for this issue alone.

  258. Peter,
    Great site. My wife and I are the two shareholders in our corporation, created in November 2010. We created our corp intending to elect S-corp taxation. We filed IRS form 2553 to elect subchapter S tax treatment for tax tear 2010. Our corp had a small loss for 2010 (startup costs, no income) so we passed through that loss to our personal income, but it was limited to each of our bases of $500 each (joint return, so $1000). Fine, whatever. In 2011, we also elected to be taxed as an S-corp, and our corp had income of $44000, about half of which was paid to us as wages. The profit of the corp is about $20k, and sits in the corporate bank account. My wife and I also have other jobs totaling about $80k. We have taken no distributions. We will pay pass-through federal personal income tax on the S-corp profit of $20k at our marginal rate of 25%. We will also pat state (HI) personal income tax on the pass-through. Together that appears to be more than the C-corp taxes the corp would pay in federal and state corporate income taxes. We all know that the first way S-corp status saves the shareholders of a small corp who also are employees is by avoiding federal payroll taxes (FICA) and state unemployment insurance, etc. on the part of the corp income that is not paid out as wages. The second way is supposed to be avoiding “double taxation” on C-corp dividends as opposed to S-corp distributions. I have read many times about avoiding “double taxation” by electing S-corp status. But it seems that if our S-corp issues distributions to us, we will still have to pay long-term capital gains taxes on the increase in value of our bases on our personal income taxes. It seems that maybe we, as the directors of the S-corp, should have issued a distribution of most of the S-corp profit, so that there would have been little profit to pass-through. Then we, on our federal personal income taxes, would have had little pass-through income taxed at our federal marginal rate of 25%, and more of capital gains income taxed at a maximum of 15%. I had thought that because we had paid the federal S-corp income tax as pass-through, the S-corp could later issue distributions with no tax because the tax had been paid. But so far I see no way that that S-corp distributions are not taxed to the shareholders. Am I missing something? Thanks

  259. David B,

    Wow. Great question. I had to think about that one.

    You are only taxed on your distributions to the extent they exceed your basis.

    S corporation shareholders get taxed on their share of the corporation’s profits whether distributed or not, consequently, distributions are, in most cases, irrelevant.

    Sometimes, however, a distribution can create a tax liability for a shareholder. To understand this you have to understand the concept of “Basis” which refers to the amount the shareholder has invested in his S corporation stock.

    If the shareholder purchased shares in an S corporation for, say, $10,000, at that point he has $10,000 of basis in his stock. If over the course of the first year of operations, his share of the S corporation’s profits is, say, $20,000, that $20,000, if reinvested, increases his basis from $10,000 to $30,000.

    If the corporation has zero profits in year 2, but distributes $16,000 to the shareholder, the distribution decreases the shareholder’s basis to $14,000 ($30,000 minus the $16,000 equals $14,000).

    Here’s what all of this means.

    If an S corp makes a distribution to the shareholder that is in excess if the shareholder’s basis, the excess is treated as a capital gain. So, in the example above, assume the corporation makes a $15,000 distribution. Since the shareholder had basis of $14,000, the extra $1000 is treated as a capital gain on his personal tax return.

    So, although distributions usually don’t have any tax effect to shareholders, sometimes they can create capital gains. We see this often, for example, in the case of the small corporation that has used Section 179 depreciation to create large depreciation deductions. This deduction can eliminate a lot of basis quickly causing distributions to exceed basis and the triggering of capital gain.

    I hope this helped. But I do think you need to hire a qualified tax planner (CPA or Tax attorney or very experienced Enrolled Agent) to help you navigate the tax laws. A good one will save you more money than he charges in fees. And you’ll have peace of mind, to boot.

    Good luck.

  260. Hello. Great site.
    I currently have a business that teaches horseback riding lessons to people….it is currently doing 40k gross per year and is operated as a sole proprietorship. My taxable income is only 17k after expenses and deductions. In regards to getting loans/mortgages from banks, this is a problem. Banks look at the net taxable income for the self-employed, instead of the gross amount of income showing on employee’s w2’s.
    I am about to expand into running a complete full horse boarding facility. I am to lease-to-purchase a property on a three year contract for 375k with the first year option.
    I potentially have an additional 54k gross yearly revenue lined up with business to start next month.
    I will have two independent contractors that I will be paying.
    My goal is to be able to get lending as soon as possible for this property.
    I know that I need the protection of a corp but I am curious of the ways in which it might help in other ways. Ways that might help me to get financed quicker.
    From what I understand I would get a w2 from the S corp and file personal tax returns separately right?
    If I were to pay myself a salary that wanted to achieve my goals of being able to get financed, I would hurting myself too wouldn’t I? Or would the benefits of distributions still be able to work in my favor?


  261. Peter,

    I cannot tell you how much I would appreciate any and all thoughts/answers to this question. My husband has been a minority shareholder in an S corp (S corp since formation 20+ years ago). Happens to be a family biz where he was screwed by big brother. They will not buy out his stock, he has no idea initial formation documents (my guess is there were none but could be wrong). Corp making tons of money. Husband is not working in corp although he did for many years. No distributions made, ever, except to cover hubby’s taxes (and they are made equally to all shareholders). Is there any recourse whatsoever against the majority shareholders for the money my husband supposedly made in taxes (had to report on his taxes via k-1). I’m not very knowledgeable about tax terms at all, but and just wondering if I have overlooked something. Is this proper? Forever? Or is this tax evasion on the part of the majority shareholders? Corporation had approx $500 K in profits last year, have performed similarly for many years (actually better before economic decline). Please tell us…should we consult an attorney? Is there any recourse for making them purchase the stock? Or pay distributions? Or pay the money they claim they paid my husband? Can they just continue to claim they are paying us amounts they aren’t paying??! Is that normal? Customary for s-corps? My husband seems to think so. That just makes no sense to me. I would greatly appreciate any thoughts or advice!!

  262. p.s. state is Florida. I would greatly appreciate learning if this arrangement sounds typical…forever not distributing funds. Hubby has never agreed to forego distributions or reinvest profits into the company. Please tell us…is this worth pursuing? Does he have any rights to the supposed profits he “earned”? Or any way in the world to force them to buy his stock? Thank you!!

  263. Tina,

    Your husband has recourse. He can sue them and the S corporation for his share of the profits. What percentage of the S corporation does he own? Is it still in business? Are there any assets? Do the other shareholders have “deep pockets?” Is there a shareholder’s agreement? Did your husband sign it?

    Where is the S corporation located? You will probably have to file suit there.

    Before you file suit, however, you will want to send a demand letter to the other shareholders and the President of the company demanding to be allowed to inspect the books.

    They might offer to buy your husband out and that would be preferable to a lawsuit assuming the offered purchase price is fair.

  264. I am questioning, if a majority/ minority owner(s) is not an active manager. The new business manager does not make distributions as have been done in the past.
    There is a claim of economic instability, but there is cash in the bank and profits. Is there a way to get distributions in order to cover taxes for the company having been or to be carried over by K-1?
    Thank you.

  265. Reading this has been an education. I wish that I had found it earlier.

    I was a part owner in a company for seven years. At the beginning of 2011, the three current owners (I was the middle with about 25%) decided to change to S corp status. I decided to leave in the summer – at the end of August and was promised distributions to the end of my employment. I am now told that the books are only quarterly and that I am entitled only to distribution to end of June. Is this standard practice?


  266. My husband and I are the sole shareholders in an S Corp established in 1997. The company has never had a profit. We have never taken wages and loaned the company the money to stay in business, approximately $140,ooo. These loans have been through credit cards first ($60,000) and then a home equity loan line of credit on our vacation home ($80,000). These loans have been been put in writing. My first question is, can the interest paid on the HELOC go as a deduction for the S Corp (the loan and property are in our names not the company) rather than our personal taxes. The second question is if the company makes money this year should we take wages, distributions, or loan repayments?

  267. I own 100% of a NH S Corp that does all consulting service delivery outside of NH (however I pay wages to myself in NH). The balance of my profit is distributed to myself and reported on my federal 1040. My question is, do I have to pay NH corporate income tax on those profits even though all of the work was done in Florida?

  268. Peter, I have had an s corp for 11 years, loaned it money in lean times and now while it is doing better I want to recoup some of the loan money. Since my s corp has a profit do I include the loan repayment as an expense in order to reduce the net profit or is it handle solely on the k-1?
    Thanks, Lynn

  269. Lynn,

    Only the interest, if any, on the repayment of your loan to the corporation is deductible. Principal payments are not. It won’t appear on the k-1 either. Of course, repayment of the loan will reduce your basis in the S corporation. It’s a tad complicated. I think you should hire a qualified CPA or tax attorney to advise you on all of the implications of your loans, repayment of your loans, etc.

    Good luck.

  270. Hi Peter, great resource. Thanks for keeping this going!

    I have an 8-year old s-corp. 2011 is the first year with a loss – $750. I’m the sole 100% shareholder. Shareholder basis has always matched company Retained Earnings. Now both are down to $16. So I will only be able to take a $16 loss on personal return. I’m wondering how to report this, along with $75 of Section 179 depreciation.

    Schedule E has separate columns for Nonpassive Loss from K-1 and Section 179 Expense. I’m wondering where to apply the $16 – against the Nonpassive Loss or against the Section 179 Expense? Or am I able to deduct the entire $75 Section 179, with the $16 deduction applied against the Nonpassive Loss?

  271. Peter! Help!

    I just incorporated to a S-Corp this past April. I guess my big question is, should I have issued myself a W2 and reported my (Ordinary Business Income) as my wage on my personal?

    Not even sure if that is the right question..I’ve gotten SO MANY mixed answers… PLEASE HELP!

  272. Chad,

    I really need more information. What kind of business is it? Are there other employees who generate revenues? Etc. Generally, you should pay yourself wages and witthold the various payroll taxes from it. If you haven’t done that, you could send yourself a 1099 and report that amount on your 1040 as Schedule C income and pay the 15.3% payroll taxes that way.

    The issue is complex so I suggest you hire a qualified CPA or tax attorney to advise you.

  273. Hi Peter. I have question about how to fix one person’s S corporation salary – it is too low: 12K – wages and 23 left for distribution. How to make 12+5=17-wages and 23-5=18- distribution. Thank You.

  274. I have been self employed and established a sub s corp years ago. I recently took early retirement at age 62 and early ss benefit. I continue to do limited
    work paid to my sub s to help circumvent the early retirement wage limitation ie $14m. As sole owner I understand I must take some w-2 wage and of course take distributions. Unlike distributions, dividend income etc which are excluded from wage limitation, IS the w-2 income thus received going against my wage limition threshhold. E

  275. Question –
    The Employer pays portion of the FICA taxes (in the second case): $ 3,060 .

    So the federal taxes that will be paid on the shareholder distribuitions ($40,000) will be on $40,000 – $3060 = $36,940?

    Or on the full $40,000?

  276. Peter,
    I own about 75% of a s corp. The company pays my health insurance. because this is a S corp I have to claim this amount of teh health insurance as gross income. Does this additional income count towards the gross income when applying fo a mortgage?

  277. Peter,

    Amazing blog post and blog.

    I have a question that I put in google and brought me here, but could not find the answer in the comments section.

    I have a delaware incorporated S corp (formed 2008) Either last year or the year before but I am only interested for last year. I gained 60% ownership of the company, however I only took out 50% of the distributions or profit with the other partner who owns 40% taking the other 50%.

    Now this year I am realizing I made a mistake by only taking out 50% since I ended up being responsible for 60% of the taxes, as per the tax filings showing I own 60%.

    Can I take out from this years revenue / profit the difference I am owed from last year? In addition to our normal 60/40? meaning if we have $100 and I am owed $20 from last year can I take out the $20 first then split the remaining $80, 60/40? Can my partner legally have any recourse? Will I be taxed even more this year since the IRS might say that the money I took out this year even though was for money never taken last year still taxable on this years return?

  278. Great Site, I have a question. We have an S corp which we are 50% owners of. The company had a profit of $ 80,000.00 last year, $ 40,000 of that will be added to my personal tax return and the company is suposed to give me and my partner the funds to cover the taxes on the $ 40,000 profit. What happens to the $ 40,000.00
    Does the company owe that to me less the taxes it paid since it was added to my personal return or does it sit in the company account? Should I be entitled to receive that money tax free since I already paid the taxes on it?
    Thanks For Your Time

  279. Hi Peter,

    I am planing to form an S corporation and give two employees 5% of the company. Can I legally have an agreement in place that they would have to stay with a company for a certain period of time and perform certain work or otherwise they lose their 5%? If yes, what would I sign?

    Thank you!

  280. In an S corp with one officer/employee, can the corporation make contributions to an HSA for this officer? And if so, how are they reported? I have read the IRS publications related to this, and it seems that it can be done if it is for the purpose of compensation of services rendered. I understand that it cannot be done on a pre-tax basis and is subject to employment taxes. Just wondering how to record this in the financial records and how to report it for tax purposes. Thank you in advance for your time and help.

  281. I am a bookkeeper for an S Corp. Two equal shareholders that draw a small salary each with is FICA taxed. They use distributions as well. What kind of account would the distributions be and how would I “map” that for income tax preparation? Also, is this distribution account to be closed at year end?

  282. Hi Peter, amazing content here – thanks for all your time in responding. Question is, during the first year that we started the company (an s-corp), we did not withdraw any salary or distributions. This said, does the non-paid salaries increase the stock basis?

  283. I recently started a bookkeeping position for an S Corp with one shareholder. Upon reviewing the Balance Sheet I noticed a sizeable Note Receivable-Officer account with no record of repayment being made. Journal entries from prior tax years show yearend adjustments by from the Owner’s Draw account to the Note Receivable account. The shareholder claims that a repayment is unnecessary as they were only adjustments, and terms were never established for repayment. Are there adverse tax implications here or accounting violations in having this note receivable remain on the books or could it be cleared by adjusting it back to the draw account? Thank you in advance for any advice you can give on this matter.

  284. Jennifer says:

    Can a single owner of a S corp pay themselves as a subcontractor using 1099?

  285. Jennifer,

    Yes, but that income is subject to self employment tax.

  286. Hi Peter,

    First off, great blog!

    I’ve ran an s-corp for over 10 years and do have an accountant that produces financial statements and tax returns for me and answers questions but I’d like to pose this question to you:

    I work full-time for another company (earn 100K+) and run a small web site that generates 2K in revenue per month with about 1.5K in expenses per month. I rarely take a distribution and generally use profit to purchase new equipment and software.

    Would a distribution of 1K per quarter trigger the IRS? Or should I just save 4K and pay a bonus at the end of the year?

    It’s really just a hobby (the site runs itself with very little attention from me) but I set it up as an s-corp to protect my personal assets in case some nut sues my site. It’s just play money for me but most years I don’t take anything out as it just seems pointless as a payroll company will take a chunk.. and then the government with taxes.

    So.. is the distribution so low and the fact I’m paying a hefty tax bill due to my full-time employment (with no risky deductions like office space etc.) give me such a low risk I could distribute 1K per quarter without losing sleep?


  287. Peter,


  288. I’m a shareholder in an S-Corp that purchased property in 2011, and distributed rental income monthly to each shareholder. In 2012 they decided it’s time to pay back the loan that was taken out when we bought the property, so there have been no distributions so far – all the rental income goes into paying off the loan.

    But I’m hearing that shareholders are still going to get a K-1 for 2012 showing that we received our portion of the rental income and interest. Can you explain this? Why is money that the corporation uses to pay the loan going to be become ‘income’ on my tax returns?

    S-Corp ownership has already caused me to pay income tax on money I never saw in 2011, and I was hoping that would stop.

  289. How do I get the $$ showing on my K-1? Can that be entered as a loan if the $$ are not in the bank account?

  290. First, thank you for an excellent article. We have had an S Corp since 2006. We set it up with both our names (hubby 100% shareholder and myself as spouse with 0%/community property interest only). It is my understanding ONLY the shareholders are required to pay themselves a “reasonable” wage for services. Is this correct? I do paperwork in the biz, but do not issue myself a wage–though we did for a year or two when we were investing in a 401K–another story!

    One other question. During the recent economy slow down (we are in construction) when the net profit of the company is negative or very low I have been told the S Corp does not have to pay a reasonable wage to my husband if it isn’t profiting. Is this correct? Is there a dollar amount that triggers required payroll to shareholders?
    Thanks….Very interesting and informative article. From everything I have gathered over the years, it is the most beneficial in tax savings to pay yourself the bare minimum required as long as you are investing in your own retirement since you aren’t funding the SS/Med for it. Your article confirms this for me.

  291. Hi Peter,

    I’m 35% shareholder in an S-Corp, the president and 55% shareholder has given himself multiples raises over the last year equaling ~50%. The most recent raise of ~12% in July. He also sent out an e-mail in July saying that the company did not have enough money to pay any more distributions. I am active in the companies as a full time paid consultant. We are about to be awarded a contract that would increase our revenue ~600%. I’m very concerned that majority owner will simply give himself a giant raise to cheat the other partners. What are my options? Thank you!

  292. Peter,
    Going back to your original example of 40k wages and distribution etc. From an S corp ownership perspective. Does the Scorp subtract the 7.65% tax from wages(employee actually gets 36,940) but the company issues w2 for the full 40k? And the corp has to pay in reality $6040…15.3%?

  293. My business partner is talking about shifting to an S corp next year. As I do not handle finances I tend to trust what he is suggesting though I want to educate myself on this side of things. He works only part time for the company and I work 50-60 hrs a week for the company. How could this positively or negatively affect our situation? Would I be on the short end in anyway being the one who puts in more time and effort into the company now and/or long term?

  294. Peter,
    I am a shareholder in an S corp (13%). The company has followed a “guideline” of making yearly distributions equal to the yearly net income. In 2005 8.9% (~$278,000) of the company was purchased by the corporation from a departing shareholder. It has been “understood” the ($278,000) was distributed to the shareholders and then loaned back to the corporation ut no loan agreement or note was ever written up. A major shareholder (33%) is now departing and in addition to the purchase price for his 33% stake in the corporation he claims the corporation must pay him $129,000 (his share of the $278,000 in 2005) even though his purchase price accounts for his increased shareholding percentage due to the 2005 purchase. All of this “arrangement” is sanctioned by our CPA. Our CPA thinks there is a moral obligation to make yearly distributions equal to the net income because shareholders have paid tax on the total amount. I have a couple of questions. Is it typical for S corps to make yearly distributions equal to the net income even though is makes the corp cash poor at the beginning of the year? Is it a moral obligation to do so? Wouldn’t the departing shareholder essentially be paid twice for the shares purchased in 2005 if he is paid the $129,000? Thanks for your help.

  295. Peter,

    Firt of all thanks for spending your valuable time trying to help others.

    I had a question about paying wages. What is someone did not know about the salary requirements and did not pay any salary for the entire year. How can we go back and
    1. define who’s getting what salary.
    2. Pay all taxes on the salary.


  296. I have a couple of questions around distributions:

    1. How can a distribution be taken? ex: Check? Directly withdrawal from bank account? Transfer from corporation bank account to personal account? Please advise on the different methods and recommended method. Is there any method the the IRS frowns up or does not like?

    2. How often can a distribution be taken?

    3. Can a distribution be for an amount greater than a given months salary?

    Thanks in advance for your input.

  297. Peter, the blog is amazing and full of useful information – thank you! I’ve read it all and have a short question that was not addressed. I hoped you can give some guidance or suggest what I should look into. I hav spent about 6 hours already trying to find out how make it right.
    One of my clients (100% S-corp shareholder) has medical insurance premiums paid by S-corp for her while the Scorp generates huge losses. The amount was includd as her income on Sch E reducing her loss (starting this year, it will be included in her W-2). She is adequately financing her corp – huge basis.
    However, I was not sure if the imputed income in prior years was supposed to be reducing her loss (as a result, adding to her basis). For ex., this year she will have the income included in W-2 and there will be no affect on her Sch E.
    My understanding is the imputed income is also not a subject to SE tax (FICA taxes). Correct?
    Thank you.

  298. Peter ~

    EXCELLENT Blog…soooo educational and informative. THANK YOU for taking the time and dedication to keep the public informed in such an easy to read manner! You should be proud! In a world of me, me, me … you have truely given back!

    My question – i am a 50%/50% owner in an S-Corp…i am the ’employee owner’ who does all the work and has the salary – set at 108K to satisfy the IRS – the other owner gets a token 10K salary.

    With regard to distributions – the other owner dips into the Bank Account and takes funds as needed – this past year the distributions were 13K me and 93K them – clearly as i understand this violates S-Corp Status…this is a one-time (one year) problem as they are having a ‘life issue’ and need the funds

    I am now tasked with preparing the taxes – soooo…is the other owners distribution in excess of 13K now classified as a ‘loan’? if not, then how do i handle this?

  299. Hi,
    Can you help me with my question please. We are 2 partners in a S-Corp. I received a W-2 for $120,000 and a K-1 for $76,000. My taxes is $43,000 base on 176,000 taxable income.
    My questions are:

    1- Is there anything I can do to save on my taxes?
    2- What should I do for 2013 to avoid paying high taxes?



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