What Are S Corp Distributions? The Solo’s Simple and Stress-Free Guide

As a solopreneur, you need to pay taxes. But while you can’t change the fact that you have to pay, you do have a surprising amount of influence on how much tax you need to pay.

From closely tracking your deductible expenses to contributing to a retirement plan, there are plenty of things you can do to lower your tax bill. The most meaningful one? Electing to be taxed as an S Corp. It’s a move that could end up saving you thousands on your taxes.

If and when you decide to make the switch, you’ll need to deal with something called S Corp distributions. Don’t let your eyes glaze over quite yet. We have your straightforward guide to S Corp distributions and the other tax implications you should know.

What Exactly Are S Corp Distributions?

Before you can fully grasp S Corp distributions, it’s helpful to get a quick understanding of what an S Corp is.

When you’re a solo business owner, you have some say over how you want to run and operate your business. You might opt to be a sole proprietor, meaning you don’t have a formal, established entity for your business. Or, you might choose to set up a business entity (like an LLC) to separate your business assets from your personal ones and benefit from a little more legitimacy and protection.

While an S Corp is commonly called a business entity, that’s not entirely correct. An S Corp is actually a tax status that you can elect in addition to your existing business entity. So, for example, you could be an LLC that’s taxed as an S Corp.

Why bother doing that? When you’re an S Corp, you get to split your total business income into two different buckets: a reasonable salary and your business profits. Here’s the difference:

• Your reasonable salary: You get to set a salary for yourself, provided it’s reasonable—meaning it’s aligned with what you’d get paid for similar work in a traditional job. You only pay self-employment taxes on this part. Reasonable is the operative word here. You can’t take all of your money out as distributions to avoid payroll taxes—the IRS keeps a close eye on this.
• Your business profits: The rest of your money isn’t part of your salary, but it’s still accessible to you in the form of S Corp distributions. However, this amount is not subject to self-employment taxes, which is where the major tax savings come into play.

Put simply, an S Corp allows you to split your business income into two categories, so you only need to pay self-employment tax on a smaller portion—while still being completely above board and compliant.

Not sure how to set a reasonable salary for yourself? Not to worry. Lettuce will figure it out for you—and run your monthly payroll too.

So How Do S Corp Distributions Work?

Once you’ve paid yourself your reasonable salary (this happens when you run your regular S Corp payroll), any money your business makes beyond that can be taken out as an S Corp distribution.

This is basically a fancy term for paying yourself from your business profits. However, unlike your salary, you don’t need to pay self-employment tax on distributions.

You might hear people compare distributions to an “owner’s draw,” which is how a business owner takes money out of the business for personal use. Owners’ draws and distributions have a lot of overlap, as they’re both ways to move money from your business to your personal account.

But, for S Corps, the term “distribution” is used—and it comes with some extra tax responsibilities, such as making sure you’ve already run payroll and paid yourself a salary before taking money out. That’s crucial.

How Do You Take an S Corp Distribution?

Running your own distributions requires you to handle your taxes in a completely new way. If you’re doing it on your own, there are a series of steps and ongoing math you’ll need to do.

1. Pay Your Salary: Remember, you need to pay yourself your reasonable salary (through your payroll) before you can take a distribution. Don’t want to deal with payroll logistics? Lettuce can automate the entire thing for you.
2. Check Your Business Profits: Look at how much money is left in your business after you cover your payroll, business expenses, and taxes. What’s left is what you can take as a distribution.
3. Transfer the Money: Move the desired distribution amount from your business bank account to your personal account—just like any other bank transfer. No payroll or taxes need to be withheld here.
4. Record the Transaction: In your bookkeeping software, make a note of the date and amount of the distribution. You’ll want this information for tax time.

Rather skip the admin work and record keeping? Lettuce will do it all for you.

What Paperwork Do You Need for S Corp Distributions?

One of the great things about S Corp distributions is that they don’t require piles of paperwork—following the above steps is all you need. With that said, as an S Corp, there are a few key forms you’ll need when it’s time to file your taxes:

• Form 1120-S: This is your S Corp’s annual tax return. It reports your business’s overall income and deductions. It also includes a section called a Schedule K, which is where shareholder allocations (including distributions) are reported. This is why you’ll want a paper trail documenting the distributions you took.
• Schedule K-1: This form breaks down each shareholder’s share of the company’s income, deductions, credits, and distributions. It’s how the IRS knows what each owner personally owes income tax on. You are technically a shareholder of your own S Corp, and you’ll include your Schedule K-1 when you file your individual tax return (using Form 1040).

Much like with anything else in your business, the key is to be as accurate and detailed as possible. Lettuce will keep track of everything for you, including completing your Form 1120-S and Schedule K-1, so you can focus on your work (without stressing over the numbers).

4 Tips to Optimize Your S Corp Distributions

That’s the gist of S Corp distributions, but there are a few other tips to keep in mind to reap the benefits of this tax status—without raising any eyebrows at the IRS:

1. Set a reasonable salary: Reasonable is the operative word here. While setting a low salary helps you save on self-employment tax, it triggers alarms with the IRS. Consider industry benchmarks and the value you bring to your business to pay yourself an amount that’s fair and aligned with the rest of the market. Again, Lettuce will do this automatically for you.
2. Plan ahead for taxes: As an S Corp, if you aren’t automating your tax payments through your payroll using Lettuce, you’ll need to make quarterly estimated tax payments. Plan ahead so that you can set aside money, make your payments ahead of the deadline, and avoid any nasty surprises at tax time.
3. Stay up-to-date on tax laws: Change is the only constant with tax laws. Stay informed about any changes that could impact your tax planning. An automated platform like Lettuce or a qualified tax professional can help you make smarter decisions.
4. Use the right tools: Tax laws and compliance can get complicated, but the right tools can take the pain out of the process. Lettuce will calculate your reasonable salary based on industry data, automatically allocate your income between payroll and distributions, and even handle your tax payments for you.

Distributions Demystified

S Corp distributions probably weren’t high on the list of things you thought you’d master as a solo business owner. But if you decide to elect S Corp status for your business-of-one, you’ll need to understand the ins and outs (or at least the basics) of distributions.

Fortunately, you don’t need an accounting degree to make that happen. With this simple guide and an automated accounting platform like Lettuce, you can manage your reasonable salary and distributions with clarity, confidence, and compliance—and without all of the chaos.

Ready to simplify taxes and accounting while saving thousands? Check out Lettuce today.