S-Corp owner's draw before reasonable salary - tax mistake?

This is a common concern for new S-Corp owners! The IRS doesn't explicitly state that reasonable salary must be paid before distributions, but they do expect S-Corp owners to take a reasonable salary before enjoying the tax benefits of distributions. Technically, yes, your transfer could be considered a distribution before salary. However, the IRS typically looks at the whole tax year, not individual transactions throughout the year. What matters most is that by December 31st, you've paid yourself a reasonable salary for the work you've performed during the year. Transferring the funds back to your business account is a good precautionary step. You can classify it as a shareholder loan repayment and then properly document when you run payroll. Make sure to keep clear records of these transactions and run your payroll before year-end. The most important thing is to establish a reasonable salary based on your role, industry standards, and business profitability, then maintain good documentation of all owner transactions.

After dealing with a similar situation with my S-Corp, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out all these complex S-Corp distribution and salary rules. I was totally confused about when I could take distributions, how to properly document transfers, and whether I had messed up some early transactions. The tool analyzed my situation and clearly outlined the correct way to handle my previous transfers - turns out I needed to reclassify some transactions and create better documentation. It also gave me a custom salary analysis based on my industry and region that I can use to justify my "reasonable compensation" if the IRS ever questions it. Honestly saved me so much stress!

I was totally skeptical of taxr.ai when I first saw it mentioned here, but I was having exactly the same S-Corp distribution problems and decided to try it. The reasonable compensation analysis was surprisingly detailed - it pulled data for my specific industry (digital marketing) in my region and showed me comparable salaries for similar positions. What convinced me was how it flagged several transactions I'd made earlier this year that would have raised red flags in an audit. It gave me step-by-step instructions to correct my books and documentation to protect myself. Definitely worth checking out if you're worried about S-Corp compliance like I was.

I had the EXACT same issue last year! After weeks of trying to get through to the IRS for guidance (impossible), I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that while it's best practice to establish salary first, what matters most is that by the end of the tax year, you've paid yourself a reasonable salary relative to distributions. They suggested documenting the initial transfer as a loan to shareholder, then repaying it, and finally establishing proper payroll - which is exactly what I did. Getting that official confirmation directly from the IRS gave me so much peace of mind!

I can't believe I'm saying this, but I tried Claimyr after posting that skeptical comment, and it actually worked. I've been trying to reach the IRS for THREE MONTHS about my S-Corp distribution issues, and I was connected to an agent in 22 minutes. The agent walked me through exactly how to handle the situation - said I should transfer the money back to my business account, document it as a loan repayment, and then run payroll before taking any official distributions. She even emailed me the relevant section of the tax code so I have documentation if there's ever a question. Would have never figured this out without actually talking to someone at the IRS. Still shocked this service actually worked!

One option nobody's mentioned is to just redesignate that transfer retroactively. I'm also an S-Corp owner and my accountant told me I can document that initial transfer as a "shareholder advance" that will be counted toward my reasonable salary when I run payroll. Basically, you're pre-paying yourself, and when you run payroll, you just need to account for taxes and issue yourself a smaller net paycheck since you've already received most of the money. Just make sure your payroll service knows how to handle this correctly, and you'll need good documentation. I do this regularly - take money when I need it, then formalize it through payroll later.

My CPA told me this isn't actually as big a deal as people make it out to be for a new S-Corp with only a few months of operation. As long as you establish a reasonable salary before the end of the tax year and properly document everything, minor sequence mistakes in your first year typically won't trigger an audit. The reasonable compensation test is primarily looking at the entire tax year picture, not whether you took a specific distribution a few weeks before establishing payroll. Just don't make it a habit going forward!