What happens if I leave S Corp profits in the business account instead of taking as salary/distribution - how is it taxed?

The short answer is that you'll be taxed on those profits this year even though you're leaving the money in the business account. That's actually one of the key features of an S Corporation. As the sole owner of an S Corp, you pay taxes on your share of the company's profits regardless of whether you distribute that money to yourself or leave it in the business. This is called "pass-through taxation" - the profits pass through the business and are reported on your personal tax return via Schedule K-1. So that $135k sitting in your business savings will be reported on your personal return this year and you'll pay taxes on it now, even though you haven't physically taken the money out of the business. The good news is that when you do eventually take those funds as a distribution later, you won't be taxed on them again (assuming they were properly reported as income previously).

After struggling with this exact issue last year, I found an amazing tool that helped sort through all my S Corp tax questions. Try checking out https://taxr.ai - it analyzes all your business docs and explains exactly how different financial decisions impact your taxes. When I was confused about retained earnings vs distributions in my S Corp, I uploaded my business bank statements and tax docs, and it gave me a clear breakdown of what would be taxed when. It even showed me how much I could safely keep in my business account without raising red flags with the IRS about reasonable compensation issues.

Just wanted to follow up - I decided to try taxr.ai despite my initial skepticism, and I'm actually really impressed. The analysis showed me that I was taking too much as distribution compared to salary, which was putting me at audit risk. The document system was way more secure than I expected (they explained their encryption process), and the breakdown of my S Corp tax situation was super clear. It showed me exactly how much of my profits would be taxed this year versus what I could potentially defer. I ended up adjusting my year-end compensation strategy based on their recommendations. Definitely worth checking out if you're trying to optimize your S Corp tax situation.

If you're still having questions after sorting through the basics, you might want to talk directly with the IRS about your specific situation. I know that sounds scary, but I used https://claimyr.com and got through to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had a similar question about my S-Corp retained earnings and wasn't sure if I was calculating my pass-through income correctly. The IRS agent I spoke with explained exactly how the K-1 reporting works and confirmed what I needed to document to show the distinction between operating capital and excess profits.

Ok I officially eat my words about Claimyr. After my snarky comment, I decided to try it because I was desperate to resolve a question about my S-Corp's retained earnings before filing deadline. It actually worked exactly as advertised - I got a call back in about 20 minutes connecting me to an IRS representative who specifically handled business tax issues. The agent walked me through exactly how to report retained profits that stay in my business account and confirmed I was right to be concerned about the "reasonable compensation" requirements. This saved me from potentially misfiling my return and cleared up my confusion about when exactly those profits get taxed. If you're struggling with S-Corp tax questions that online research isn't solving, getting direct confirmation from the IRS is surprisingly helpful.

Something no one's mentioned yet - you need to be careful about accumulated earnings tax if you keep too much cash in the business without a specific business purpose. The IRS might question why you're hoarding cash in the business. For S Corps, while there's technically no accumulated earnings tax like with C Corps, the IRS can still question whether you're keeping money in the business to avoid self-employment taxes that would apply if you took it as salary. Make sure you can justify that $135k as being held for legitimate business purposes like future expansion, equipment purchases, emergency fund, etc.

Has anyone used CorpNet for handling their S Corp filings? My accountant just retired and I'm trying to figure out the cheapest way to manage all this paperwork and tax stuff for next year.

One thing I'd add to all the great advice here - make sure you're tracking your "basis" in the S Corp properly. When you leave profits in the business like that $135k, it increases your basis in the company. This becomes important later if you ever take out more than the accumulated earnings or if you sell the business. Your basis starts with what you initially invested in the company, then increases with your share of profits (even if left in the business) and decreases with distributions you actually take. Keeping good records of this will save you headaches down the road, especially if you ever need to take large distributions or loans from the company. Most people don't think about basis tracking until they need it, but it's much easier to maintain these records as you go rather than trying to reconstruct them years later.

One more consideration that might be relevant - if you're planning to keep that $135k in the business for a while, make sure you're at least earning some interest on it. Since you'll be paying taxes on those profits this year regardless, you might as well put that money to work in a high-yield business savings account or short-term CDs. Also, don't forget that keeping cash reserves in the business can actually be smart for cash flow management and unexpected expenses. Just make sure your "reasonable salary" is truly reasonable for your industry and role - the IRS scrutinizes S Corps where owners take very low salaries but leave large amounts as retained earnings, since it can look like you're trying to avoid payroll taxes. The good news is that S Corp taxation is generally more straightforward than people think once you understand the pass-through concept. You're essentially paying individual tax rates on business profits, but you get to avoid the double taxation that C Corps face.