Every dollar you take out is salary or a distribution. The split sets your payroll tax.
An S election turns business profit into a pass-through, but it does not turn all of it into distributions. Pay yourself a reasonable salary first — subject to payroll tax like anyone else’s paycheck — and only what is left can move as a distribution that skips it. Get the split wrong and the savings the election was supposed to create turn into an audit instead.
Salary (W-2)
Reasonable compensation for the work you actually do, run through payroll like any employee’s paycheck. Subject to Social Security and Medicare, split between the business and you.
Distribution
Profit paid out beyond salary, in proportion to ownership. Not subject to payroll tax, provided it stays within your stock and loan basis.
The election is simple. Staying inside it is not
Four things worth knowing before the first payroll run.
Three stages, in the order they come up
Making the election comes first. Running payroll correctly is where most of the ongoing risk sits. What sits on top decides how much of this actually pays off.
Making and keeping the election
Running payroll and taking distributions
What sits on top
Depreciation, cost segregation and property-level filings sit alongside the S corporation rules, not instead of them. That combination is handled by US Real Estate CPA — our property practice, and a Taxule firm.
What is missed costs more than what is owed
Read like a bill, because that is close to how it arrives.
Distributions dressed up as pay to dodge FICA, reclassified with penalties and interest on top.
Distributions that do not track ownership percentages exactly can be read as a second class.
The business run as though S status applied, with no Form 2553 on record anywhere.
Paid out as if tax-free, taxed as capital gain instead once basis runs out.
What owners ask first
How much salary is “reasonable”?
There is no fixed formula or percentage of profit. The IRS and the courts look at facts such as what comparable businesses pay for comparable work, the time and effort the owner puts in, and what the company would have paid a non-owner to do the same job.
Can I take everything as a distribution and skip payroll entirely?
No, not if you work in the business. The IRS routinely reclassifies distributions as wages when no reasonable salary was paid at all, adding back payroll tax plus penalties and interest.
We have a shareholder who is not a US citizen or resident. Is that a problem?
Yes. A single nonresident alien shareholder disqualifies S status entirely, and the effect is immediate rather than something that can be planned around after the fact.
Does every state respect the S election?
No. Several states require a separate state-level S election, some apply an entity-level tax on top of pass-through treatment, and a few do not recognize S status at all.
How is this priced?
A fixed fee, scoped from your entity, states and payroll setup. Business engagements start at $2,400 a year, agreed in writing before any work begins. Never hourly.
Send us last year’s K-1s and payroll.
That is usually enough to tell you whether the salary and distribution split holds up, and what the QBI deduction is actually worth to you. We come back with a scope and a fixed price. If we are not the right firm for you, we will say so rather than quote for it.
Start scoping