S Corp Distributions Made Simple for Solopreneurs

Hitting the $60,000 profit mark as a solopreneur unlocks significant tax savings through S Corp distributions, helping you cut down on self-employment taxes and save thousands. Success hinges on balancing a reasonable salary with strategic distributions to maximize your tax efficiency. 

What if you could keep more of your hard-earned money without juggling spreadsheets or stressing over tax code? Many solopreneurs still run as sole proprietors, paying thousands more in self-employment taxes than they need to. The fix is simpler than you think: elect S Corp status and take advantage of S Corp distributions.

Here’s how it works. Once you form an S Corp, you split your income into two parts: a reasonable salary (taxed like regular wages) and tax-advantaged distributions (your share of profits). But you don’t have to figure this out on your own. Instead of wrestling with numbers or second-guessing IRS rules, you can let Lettuce handle the heavy lifting.

With Lettuce, payroll, filings, and compliance run on autopilot so you can grow your business and keep more of what you earn.

What Exactly Is an S Corp?

An S Corporation (S Corp) isn’t a type of business. It’s a tax status you elect. It has big benefits: reduced self-employment taxes and eligibility for certain tax deductions and credits. That means no double taxation and the chance to save thousands every year.

An S Corp lets you split your income into two buckets. One is a reasonable salary (subject to payroll taxes). The other is owners’ distributions (not subject to self-employment tax). This split is why so many solopreneurs, freelancers, and contractors choose the S Corp path—because it keeps more money in their pockets.

What Are S Corp Distributions and How Do They Work?

Think of S Corp distributions as your business profits coming home to you through a much more tax-friendly door. Once you elect S Corp status, you wear two hats: employee and owner. You pay yourself a reasonable salary for your work, then take the remaining profits as distributions. For solopreneurs and freelancers, this is how you stop paying more taxes than you need to.

Here’s the difference in plain terms:

• Salary is taxed like regular wages and is subject to payroll (FICA) taxes for Social Security and Medicare.
• Distributions are taxed as personal income only, no self-employment tax in sight.
• For a business-of-one, proportionality is simple. You own 100%, so you receive 100% of the distributions.
• Compliance still matters. The IRS expects you to take a fair salary first, and if you underpay yourself, they can reclassify distributions as wages.

That difference in treatment is where the tax savings happen. On $100,000 in profit, a sole proprietor pays self-employment tax on most of that amount, about $14,129, plus income tax. With an S Corp, you might take a $40,000 salary and $60,000 in distributions. Only the salary is subject to payroll taxes, which cuts your self-employment tax bill by more than $8,000. Depending on your income level and salary split, the savings can climb past $15,000 a year.

For solopreneurs wondering how to pay themselves with S Corp distributions, the answer is simple: set a fair salary, take the rest as distributions, and follow IRS rules. Done right, this is one of the easiest ways for a business of one to keep more earnings.

Curious if an S Corp is right for you?

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How Much Should You Take as Salary vs.Distributions?

Many solopreneurs get stuck here. How much should you pay yourself as salary, and how much should flow through as distributions? Get it wrong, and you risk overpaying the IRS or, even worse, drawing audit attention.

Why $60,000 Profit Is the Turning Point

It usually makes sense to elect S Corp status once your business consistently earns at least $60,000 in annual profit. Why? Because at that level you can:

• Pay yourself a reasonable salary and cover payroll taxes.
• Take additional profits as distributions, which avoid the 15.3% self-employment tax.
• Outweigh the extra costs of maintaining an S Corp, like running payroll and filing Form 1120-S.

Savings become even more compelling as profits climb past $80,000. That’s when the balance of salary and distributions really starts putting thousands back in your pocket.

How to Split Salary and Distributions

So how do you actually decide the right mix? The IRS doesn’t give a fixed formula, but it does give clear rules about what counts as reasonable. The rest comes down to your profits, your role, and proper documentation.

Here’s the framework every solopreneur can follow:

1. Pay yourself a reasonable salary first. The IRS requires shareholder-employees to take “reasonable compensation.” That means what other businesses would pay for similar services in your role and location. You’ll report this through Form W-2, just like any other employee.
2. Take the remaining profits as distributions. After your salary, the rest flows through to you as distributions. These are reported on your Schedule K-1, attached to the S Corp’s Form 1120-S, and taxed only as personal income. No payroll tax.
3. Ignore the outdated 50/50 rule. Some believe profits must be split evenly between salary and distributions. The IRS doesn’t recognize this shortcut, and it can trigger scrutiny if your salary doesn’t match industry standards.
4. Adjust as profits change. Your salary should stay consistent, but distributions can rise or fall with business performance. If one quarter is strong, you can take more. If it’s lean, you can take less.
5. Keep clear records. Document how you set your salary and when you take distributions. Payroll records, W-2s, and bank statements help protect you if the IRS has questions.
6. Let automation handle the math. Lettuce calculates your optimal salary-to-distribution ratio using real-time business data and IRS guidance, then automatically runs payroll, tracks distributions, and files the correct forms on time.

In short, your salary keeps you compliant, your distributions keep more money in your pocket, and smart automation makes the whole system run (without the stress).

Common Mistakes Solopreneurs Make with S Corp Distributions

Running a business of one is no small feat, and an S Corp can feel like a whole new playbook. The good news? Most of the mistakes solopreneurs make are easy to spot and even easier to fix once you know what to watch for.

• Not paying yourself a fair salary: Think of salary as your ticket onto the field. Skip it or set it too low, and the IRS will blow the whistle. They expect every shareholder-employee to take a reasonable salary before pulling profits as distributions. If you don’t, you risk back taxes and penalties.
• Mixing up distributions and salary: Your salary is wages. Your distributions are profits. Mix the two, and your reporting gets messy fast. Keep them separate and you’ll stay in the clear.
• Losing track of basis: Your stock basis is basically your scorecard: what you’ve invested plus the profits you’ve kept, minus what you’ve already taken out. Take more than your basis allows, and the IRS calls it a capital gain, which means extra taxes. Tracking basis keeps surprises off the scoreboard.
• Skipping documentation: Every distribution should be backed by clear records. Minutes, resolutions, transfers, it’s all part of showing the IRS you’re running a real corporation, even if you’re the only player on the team.
• Over-distributing and draining cash flow: It’s tempting to pull out every dollar of profit, but your business still needs gas in the tank. Taking too much in distributions can leave you short on cash for expenses and tax payments.
• Forgetting about state taxes: Not every state treats S Corps the same way. Some don’t recognize the status at all, which means higher state-level taxes. Always check the state rules before counting your full savings.

How Lettuce Simplifies S Corp Distributions

S Corp distributions are where most solopreneurs start second-guessing themselves. How much counts as a fair salary? How do you keep payroll and distributions separate? And what happens if the IRS comes calling? That’s exactly the kind of headache Lettuce was built to take off your plate.

Here’s how Lettuce makes it simple:

• Smart salary calculations. Lettuce determines a reasonable salary based on role, industry, and income, keeping solopreneurs compliant with IRS standards.
• Automatic distributions. Once your salary is set, Lettuce tracks profits and processes distributions accurately and on time.
• Stress-free compliance. Lettuce handles payroll filings, Form 1120-S, W-2s, and K-1s, ensuring all documentation is in place.
• All-in-one financial back office. Lettuce integrates banking, bookkeeping, payroll, and tax preparation into one platform so solopreneurs see real-time savings without juggling multiple tools.
• Audit defense guaranteed. If the IRS questions salary or distributions, Lettuce provides audit defense through certified CPAs (at no extra charge to you).

Instead of wrestling with rules or worrying about mistakes, Lettuce makes S Corp distributions simple, automatic, and stress-free so you can focus on running your business while keeping more of what you earn.

S Corp Distributions for Solopreneurs: Your Top Questions Answered

S Corp distributions can feel confusing, especially if you’re running a business-of-one. The key is knowing what counts as salary, what counts as distributions, and how the IRS expects you to handle both. Here are the most common questions solopreneurs ask, answered simply.

Are S Corp distributions taxable for single-member businesses?

Distributions aren’t subject to self-employment tax. They’re not subject to capital gains tax either as long as they don’t exceed your stock basis (the amount you’ve invested plus profits kept in the business). The S Corp’s net income passes through to you and is reported on your personal return, whether or not you take a distribution. Then it is taxed as your ordinary income at the tax rate applicable to your tax bracket. How often can I take S Corp distributions?

Anytime profits are available, monthly, quarterly, or irregularly. Many solopreneurs prefer quarterly distributions alongside salary. Just ensure you maintain cash flow and don’t distribute more than your basis.

What happens if I take too much as distributions and not enough as salary?

The IRS requires shareholder-employees to take a “reasonable salary” first. If your salary is too low, the IRS can reclassify distributions as wages and charge back payroll taxes, penalties, and interest.

Can I adjust my distributions if profits fluctuate?

Yes. Your salary should remain consistent, but distributions can increase or decrease with business performance.

Is it okay to take distributions irregularly or in lump sums?

Yes. Timing is flexible as long as profits support it. Just keep in mind that larger distributions mean larger tax bills, so consider timing for overall planning.

What records should I keep?

Maintain clear separation between salary and distributions. That means W-2s and payroll records for salary, and bank transfers, plus Schedule K-1 for distributions. Automated platforms like Lettuce track this for you, keeping records accurate and audit-ready.

Start Taking Home More—With Zero Guesswork

S Corp distributions aren’t just a tax rule. They’re one of the most effective ways for solopreneurs to keep more of what they earn. The challenge is making sure salary and distributions are set up correctly, tracked properly, and reported without error.

That’s where Lettuce changes the game. By automating payroll, filings, and distributions, Lettuce turns a complicated process into something effortless. You stay compliant, avoid IRS headaches, and watch more of your hard work show up as take-home pay.

Take our quiz to see how much you could be saving with Lettuce.