Can S-Corp owner skip salary/distributions for a year if business is profitable?
I've owned an S-Corporation that's been doing well for several years now. My CPA has always handled the salary vs. distribution balance to optimize my tax situation. All has been smooth sailing until now. Here's the thing - I'm expecting to inherit some money soon. The tricky part is there's an IRA involved that might force me to take the ENTIRE value in a single calendar year instead of stretching it over 10 years. We're talking about approximately $425,000 from a traditional IRA that would count as income for me in that one year. My question is: Can I choose to take NO salary and NO distributions from my profitable S-Corp during the year I receive this massive IRA distribution? If I leave all the profits in the company's account instead of paying myself, will I still owe taxes on those profits? Since I'll be the executor of the estate, I should be able to somewhat control when the IRA distribution happens. Taking that much additional income is already going to push me into higher tax brackets, and I'd really like to minimize my other income sources during that year to avoid getting completely hammered on taxes.
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Katherine Shultz
While an S-Corporation's profits pass through to your personal return regardless of distributions, there's an important distinction to understand about salary requirements. The IRS requires S-Corp owners who provide services to take a "reasonable compensation" as salary. Skipping salary entirely for a year when the business is profitable and you're still actively involved could trigger IRS scrutiny. The IRS specifically looks for S-Corp owners trying to avoid payroll taxes by taking distributions instead of salary, or in your case, no compensation at all. That said, the inheritance situation creates some planning opportunities. You might be able to justify a significantly reduced (but not zero) salary for that year based on reduced involvement while handling estate matters. This would need thorough documentation of reduced hours/responsibilities to support the salary reduction.
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Marcus Marsh
•This is really helpful info, but I'm still confused about something. If I'm understanding right, even if I don't take any distributions, I'll still have to pay taxes on the S-Corp profits since they pass through to my personal return? And if I do have to take some minimum salary to keep the IRS happy, roughly what percentage of profits would be considered "reasonable"?
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Katherine Shultz
•Yes, as an S-Corporation owner, you'll pay taxes on your share of the company profits regardless of whether you take distributions. This is the fundamental "pass-through" nature of S-Corps - profits and losses flow to your personal tax return via Schedule K-1. There's no fixed percentage that automatically qualifies as "reasonable compensation." It depends on your industry, qualifications, duties, time commitment, and what comparable positions would pay. Some tax professionals suggest 30-50% of profits as a starting point, but this varies widely. During your inheritance year, documenting reduced time commitment due to executor duties could justify temporarily lowering your salary, but eliminating it completely while remaining active in the business would likely raise red flags.
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Hailey O'Leary
I went through something similar with my S-Corp last year after getting some unexpected income from a property sale. The tax hit was going to be massive, so I started researching options and found this amazing tool called taxr.ai (https://taxr.ai) that helped me model different scenarios. It analyzed my S-Corp structure and showed me exactly how much I needed to maintain as "reasonable compensation" to stay compliant while minimizing my tax burden during that high-income year. The software actually showed me that completely eliminating my salary would likely trigger an audit, but I could legally reduce it based on documented reduced hours. It saved me from making a costly mistake and gave me confidence in my approach.
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Cedric Chung
•How accurate was the information? I'm skeptical of tax software that makes recommendations about "reasonable compensation" since that's such a gray area with the IRS. Did your accountant agree with what the tool suggested?
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Talia Klein
•Did it help with calculating how much of the pass-through income you'd still be liable for even if you reduced your salary? And did it consider state taxes too? I'm in California and our state taxation of S-Corps is brutal.
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Hailey O'Leary
•The information was surprisingly accurate - it aligned almost exactly with what my CPA recommended, but it gave me the visualization and modeling tools to understand the impact of different scenarios. My accountant was actually impressed with the analysis and said it saved us time in our planning meeting. Yes, it absolutely calculated the pass-through liability while modeling reduced salary scenarios. It showed the full tax picture including self-employment taxes saved and increased income taxes. And it definitely included state tax implications - I'm in New York which is also tough tax-wise, and it incorporated those rates into the calculation. There was a specific section for state-level impacts.
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Talia Klein
I can't believe I'm saying this, but I tried taxr.ai after seeing the comment above and it was actually incredible for my situation. I was skeptical because I've used other tax calculators before that were useless for complex S-Corp scenarios. This tool let me input my specific S-Corp situation and model exactly what would happen if I reduced my salary during a high-income year (I had a large capital gain from selling property). It showed me I could legally reduce my salary somewhat based on documented circumstances but completely eliminating it would create serious audit risk. It actually calculated the exact "reasonable compensation" threshold for my industry and showed me the tax impact both ways. It literally saved me thousands in what would have been professional fees just to analyze different options.
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Maxwell St. Laurent
I see everyone talking about the S-Corp tax implications but nobody's mentioned the IRA distribution issue. When my mother passed, I had to deal with a similar situation and couldn't get anyone at the IRS to explain my options. After waiting on hold for hours multiple times, I found Claimyr (https://claimyr.com) - they got me connected to an actual IRS agent in about 20 minutes instead of the 3+ hour waits I was experiencing. The IRS agent confirmed I actually had options for the inherited IRA distribution that my accountant hadn't mentioned. You can see how their service works here: https://youtu.be/_kiP6q8DX5c. Seriously, it saved me days of frustration and waiting on hold.
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PaulineW
•How does this actually work? Is it some kind of premium line to the IRS or something? I didn't think there was any way to skip the wait times since they're so understaffed.
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Annabel Kimball
•This sounds like BS honestly. Nobody can get you "special access" to the IRS. They have one phone system and everyone has to wait in the same queue. Sounds like a scam to get desperate people's money.
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Maxwell St. Laurent
•It's not a premium line - they use an automated system that navigates the IRS phone tree and waits on hold for you. When an actual IRS agent picks up, you get a call connecting you directly with them. No special access, just technology that handles the waiting for you so you don't have to sit there listening to hold music for hours. It's definitely not a scam. I was skeptical too until I tried it. Their system just navigates through all the phone tree options and waits on hold instead of you doing it manually. When a real IRS agent finally answers, their system conferences you in. Nothing sketchy about it - they just automated the painful waiting process.
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Annabel Kimball
I need to eat my words and apologize to Profile 16. After waiting on hold with the IRS for over 2 hours yesterday trying to resolve an inherited IRA issue similar to OP's situation, I got frustrated and tried Claimyr out of desperation. Within 25 minutes I was talking to an actual IRS representative who helped me understand my options for the inherited IRA distribution. They confirmed I could split the distribution across years in certain circumstances, which directly relates to the original question about timing income. The representative spent nearly 30 minutes with me and resolved questions I'd been trying to get answered for weeks. I'm still shocked at how well it worked after being so skeptical.
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Chris Elmeda
Just wanted to add that another option is to look at increasing your deductions during the year you take the IRA distribution. Maybe accelerate charitable giving if that's something you do, max out retirement contributions to any plans you're eligible for, or look at other above-the-line deductions that might help offset some of that income. Not a complete solution to your S-Corp question, but could help with the overall tax hit.
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Jean Claude
•Would increasing business expenses in the S-Corp help too? Like could the company buy new equipment or something in that year to reduce the pass-through profits?
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Chris Elmeda
•Increasing legitimate business expenses would absolutely help reduce the S-Corp's net profit, which would mean less pass-through income on your personal return. Section 179 deductions for equipment purchases can be particularly effective for this. Just make sure any expenses are ordinary and necessary for your business - don't go buying equipment you don't actually need just for tax purposes, as that could raise red flags.
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Charity Cohan
Just a heads up, there are actually some options with that inherited IRA you might not know about. The SECURE Act changed a lot of the rules, but there are still exceptions to the 10-year distribution rule. If you're a spouse, disabled, chronically ill, not more than 10 years younger than the deceased, or the inheritor is a minor child of the deceased, you might have different options. Worth looking into before assuming you need to take it all at once!
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Josef Tearle
•This is actually really important. My tax advisor told me the same thing. The 10-year rule doesn't necessarily mean you have to take it all at once. You can often spread distributions over the 10 years, which would be much better tax-wise than taking it all in one year.
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