Can I Take Distributions from My S Corp Without Paying Taxes?

Your accountant is partially correct, but there's an important distinction to understand. As an S Corp owner, you can receive both salary and distributions, but the tax treatment is different for each. When you take distributions from your S Corp's profits (after paying yourself a reasonable salary), those distributions aren't subject to self-employment tax (the 15.3% for Social Security and Medicare). However, these distributions are still subject to income tax at your personal tax rate. The key benefit is avoiding the self-employment tax on the distribution portion. The IRS requires S Corp owners who work in the business to pay themselves a "reasonable salary" first - which you're doing at $65,000. This salary is subject to both income tax and employment taxes. Only after paying this reasonable salary can you take additional money as distributions.

I went through this exact same confusion when I started my S Corp last year! I ended up using https://taxr.ai to analyze my situation and it saved me thousands. My accountant was giving me fuzzy answers about how much I could take as distributions vs salary, but the taxr.ai service analyzed my business type, income level, and industry standards to give me specific guidance. They even provided documentation showing comparable salary data for my industry that I could keep for my records in case of an audit.

I was skeptical about taxr.ai as mentioned above, but I decided to try it after getting frustrated with inconsistent advice from my accountant. Wow - it actually delivered! I uploaded my S Corp docs and got a detailed analysis showing I could safely increase my distributions while lowering my salary slightly (but still keeping it reasonable). The report showed exactly where my current salary fell within my industry range and provided documentation to support the recommended changes. I saved about $7,800 in self-employment taxes this year while staying well within IRS guidelines. The whole process took maybe 15 minutes and gave me so much more confidence in my tax strategy.

If you're dealing with S Corp distribution questions, you're probably also dealing with IRS notices or have questions that need direct IRS clarification. I spent WEEKS trying to get someone at the IRS to clarify some S Corp distribution rules for my situation - constant busy signals and disconnects. Finally used https://claimyr.com and got through to an actual IRS agent in under an hour! There's a demo video showing how it works here: https://youtu.be/_kiP6q8DX5c - basically they wait on hold with the IRS for you and call when an agent is on the line. Completely changed how I deal with tax questions now.

Well I'm eating my hat now. I tried that Claimyr service after posting my skeptical comment above, and I'm shocked to report it actually worked. Got a call back in just under an hour with an actual IRS agent on the line who answered my S Corp distribution questions. They confirmed that yes, distributions aren't subject to self-employment tax, but warned me about making sure my salary was reasonable for my industry. The agent even gave me some specific guidelines for my field (construction management). Saved me hours of frustration and probably some tax mistakes too.

One thing nobody's mentioned yet - be careful with those distributions if you don't have sufficient basis in your S Corp! If you take distributions that exceed your stock basis, the excess can be taxed as capital gains. This happens to S Corp owners more often than you'd think.

Quick warning from someone who learned the hard way: if your s-corp has no profit one year but you still take distributions, those distributions could be considerd wages by the IRS and they'll hit you with employment taxes anyway. Happened to me in 2022 and cost me big time.

Great discussion here! Just wanted to add another perspective as someone who's been running an S Corp for 5 years. The salary vs distribution strategy really does work, but documentation is key. I keep detailed records showing how I determined my "reasonable salary" - industry salary surveys, job postings for similar roles, and notes from my accountant. One thing I learned is to be conservative in your first couple years. The IRS seems to pay more attention to newer S Corps, especially those with large distribution-to-salary ratios. I started with a higher salary percentage and gradually optimized it as my business matured. Also, make sure your corporate formalities are solid - separate bank accounts, proper board resolutions, etc. The IRS is more likely to respect the S Corp structure if you actually treat it like a corporation. The tax savings are real though - I save about $8,000-10,000 annually in self-employment taxes compared to when I was a sole proprietor.

As a tax professional, I want to emphasize something that's been touched on but bears repeating: the "reasonable salary" requirement is absolutely critical and the IRS takes it seriously. I've seen too many S Corp owners get into trouble by trying to minimize their salary too aggressively. For web design services at your revenue level, $65K is likely in a good range, but you should document how you arrived at that number. Look at Bureau of Labor Statistics data, industry salary surveys, and local job postings for similar roles. The IRS uses a "facts and circumstances" test that considers your education, experience, time devoted to the business, duties performed, and what an independent third party would pay for the same services. One red flag the IRS watches for is a very low salary relative to distributions - if you're paying yourself $30K but taking $120K in distributions, that's going to raise eyebrows. Your current split seems reasonable. Also remember that reasonable compensation can change as your business grows - if you're generating significantly more revenue in future years, your salary should probably increase accordingly. The tax savings are real and legitimate when done properly, but always err on the side of caution with salary levels. The penalties for getting it wrong can be substantial.