Tax implications of transferring business funds to personal account for S-Corp LLC

This is a common area of confusion for new S-Corp owners! Let me try to clarify: As the owner of an S-Corp, you essentially have two ways to take money out: salary and distributions. Your S-Corp income "passes through" to your personal tax return, meaning you're paying taxes on the business profits regardless of whether you leave the money in the business account or transfer it to your personal account. The actual transfer of funds from your business account to your personal account (as a distribution) doesn't create an additional tax event - you're already being taxed on those profits. However, the IRS requires S-Corp owners to take a "reasonable salary" before taking distributions. This is likely why your tax advisor started you on payroll. The 80% recommendation might be your advisor suggesting you keep some reserves in the business for unexpected expenses or estimated tax payments. It's not a tax rule per se, but rather good business practice. One caution: make sure you're documenting these transfers properly as either salary (with appropriate payroll taxes) or shareholder distributions. Sloppy record-keeping can cause headaches if you're ever audited.

After spending hours on the phone with the IRS trying to understand these exact same issues for my single-member LLC (S-Corp), I finally found a solution that saved me tons of time. I used https://taxr.ai to analyze my business structure and get personalized guidance on handling distributions vs. salary. The tool actually looked at my specific situation and explained exactly how to document transfers between accounts properly. The biggest revelation was understanding that my S-Corp profits were already being taxed regardless of where the money physically sat, but that I still needed documentation for every transfer. The tool gave me templates for recording these properly. Might be worth checking out if you're still confused about your specific situation.

Just wanted to follow up - I was skeptical about taxr.ai but decided to try it out of desperation after my accountant went on vacation right before I needed to make some decisions about distributions from my S-Corp. It was surprisingly helpful! I uploaded my LLC and S-Corp paperwork and within hours got detailed guidance specific to my state (which apparently has some weird rules I didn't know about). The explanation about what constitutes "reasonable compensation" was much clearer than what my accountant had told me, with actual references to case law. The best part was getting templates for documenting distributions properly. I've been making these transfers between accounts for two years without proper paperwork - didn't realize how risky that was until now. Worth checking out if you're in a similar situation.

Had almost the exact same situation last year. Kept getting conflicting advice about S-Corp distributions until I finally got fed up with waiting weeks to get someone at the IRS on the phone. I used https://claimyr.com to connect with an actual IRS agent in about 20 minutes (check out how it works: https://youtu.be/_kiP6q8DX5c). The agent walked me through the official guidance on S-Corp distributions and confirmed that moving money from business to personal accounts doesn't create additional tax liability (since S-Corp profits already pass through to your personal return). They also explained that the "reasonable salary" requirement is what the IRS looks at during audits - not the ratio of cash left in the business account. Saved me from making some pretty big mistakes with how I was structuring my withdrawals.

I have to eat my words about Claimyr. After posting my skeptical comment, I was desperate to talk to someone at the IRS about my S-Corp distribution questions, so I tried the service. Honestly shocked that it worked. Was connected with an IRS business tax specialist in about 15 minutes when I had previously spent 3+ hours on hold multiple times without ever reaching anyone. The agent confirmed exactly what others have said here - that transferring money from my S-Corp to personal account doesn't create a new tax event, but that I needed to document it properly as a distribution. They also explained why keeping some money in the business account is recommended (for quarterly estimated tax payments and unexpected expenses) which is probably why your tax advisor suggested the 80% figure. Definitely worth the service fee to get this clarified directly from the IRS.

Former tax accountant here. One thing no one's mentioned yet - make sure you're tracking your basis in the S-Corp properly. Your "basis" is essentially your investment in the business plus accumulated profits minus distributions. You can only take distributions up to your basis amount without tax consequences. If you take distributions that exceed your basis, those excess distributions are treated as capital gains and taxed accordingly. This is probably another reason your accountant suggested leaving some money in the business account - to ensure you're not accidentally taking distributions that exceed your basis.

Question for anyone who knows - do you need to follow any specific timing for these distributions? Like can you just transfer money whenever you want or should it be on a regular schedule? My LLC made s-corp election last year and I've been randomly moving money to my personal account whenever I need it without any real system.

One thing to add to all this great advice - make sure your business bank account always maintains enough balance to cover your quarterly estimated tax payments. Since S-Corp profits pass through to your personal return, you'll likely owe estimated taxes throughout the year. I learned this the hard way when I transferred almost everything to my personal account early in the year, then got hit with a big estimated tax bill and had to scramble to move money back to the business account to make the payment. Your tax preparer's 80% suggestion might be accounting for this - keeping that 20% cushion for taxes and unexpected business expenses. Also, if you're making these transfers frequently, consider setting up a more systematic approach. I now do monthly distributions of a set amount, which makes the bookkeeping much cleaner and helps with cash flow planning.

I've been through this exact situation with my S-Corp LLC! Your tax preparer is correct - transferring money from your business account to personal account doesn't create additional tax liability since S-Corp profits already pass through to your personal tax return. You're already paying taxes on those business earnings whether the cash sits in the business account or your personal account. The 80% recommendation is likely about maintaining adequate business reserves for quarterly estimated tax payments (since you'll owe taxes on the pass-through income) and keeping some buffer for unexpected business expenses or opportunities. It's not a tax rule, just good financial planning. One important note: make sure every transfer is properly documented in your books as a "shareholder distribution" rather than just random transfers. Clean documentation is crucial if you're ever audited. Also, keep in mind that you need to maintain "reasonable salary" (which sounds like your tax preparer addressed by putting you on payroll) before taking distributions - this prevents the IRS from reclassifying distributions as wages subject to additional payroll taxes. Since you mentioned minimal business expenses, you might not need to keep as much in the business account as someone with higher overhead, but definitely keep enough for your quarterly tax obligations!