S Corp Dividends Made Simple for Businesses-of-One

S Corp distributions are a smart way for solopreneurs to save thousands each year by avoiding the 15.3% self-employment tax on part of their income. The strategy is simple: pay yourself a reasonable salary, then take the rest as profit distributions. This keeps you IRS-compliant while maximizing your tax savings and letting you keep more of what you earn.

You work hard for every dollar, so it’s smart to ask whether an S Corp can pay dividends and what that really means for your taxes. The answer depends on the type of payout.

Most solopreneurs with an S Corp receive profit distributions after paying themselves a reasonable salary. These distributions pass through to your personal tax return and aren’t subject to self-employment tax, saving you thousands every year. They’re tax-free up to your stock basis, and anything above that basis is taxed as long-term capital gain.

There’s also a second, less common type of payout. If your S Corp was once a C Corp and has accumulated earnings and profits from those years, you can still receive those funds. In that case, the distribution is taxed just like a C Corp dividend.

Lettuce keeps it simple. It calculates your salary, tracks distributions, and ensures your payouts stay compliant, so you can focus on running your business. See your instant savings with Lettuce.

What Are S Corp Dividends and Are They Even Possible?

If you run an S Corp as a solopreneur, you might wonder: “Do I get dividends the way big C Corp shareholders do? Does this even apply to me?”

For almost every business-of-one, the answer is no. S Corps usually do not pay dividends at all. Instead, they distribute profits through distributions.

Here’s why. Dividends are payments made from a corporation’s after-tax profits. A C Corp pays tax on its income first, then shareholders pay tax again when they receive dividends. This results in double taxation.

S Corps avoid that extra layer of tax. They are pass-through entities, which means profits are not taxed at the corporate level. Instead, they flow directly to each shareholder’s personal tax return. When you take money out, it’s called a distribution, not a dividend. One nuance worth knowing is that you may owe tax on your share of S Corp profits even if you don’t actually withdraw the cash.

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The S Corp Dividend Exception

There is only one rare exception. If your S Corp has accumulated earnings and profits (E&P) from years it was taxed as a C Corp or from acquiring a C Corp, part of your payout could be treated like a dividend and taxed accordingly.

But for most solopreneurs running a small S Corp, this scenario never comes up.

To put it simply for a business of one:

• Your payouts are almost always distributions. These pass through, avoid double taxation, and are not subject to self-employment tax.
• Dividends only apply in rare cases where old C Corp earnings still exist.
• Distributions usually give solopreneurs more favorable treatment, because they are tax-free up to your stock basis and only the excess is taxed as capital gain.

In practice, nearly every solopreneur with an S Corp will see their payouts treated as distributions, not dividends and that’s a big reason this structure is so effective for tax savings.

S Corp Dividends vs. Distributions: Key Tax Differences

Now that you know most S Corps don’t pay dividends in the traditional sense, the next step is to understand how the IRS treats these payouts. For a business-of-one, the distinction matters because it changes both your tax savings and your reporting requirements.

• Distributions are the standard S Corp payout. They are reported on Schedule K-1 (Form 1120-S) and flow through to your personal return. They are generally tax-free up to your stock basis and are not subject to self-employment tax. That’s where the real savings happen.
• Dividends are rare but possible. If your S Corp has accumulated earnings and profits (E&P) from a prior life as a C Corp or through acquiring one, those payouts are treated like traditional C Corp dividends. In that case, you would receive a Form 1099-DIV, and double taxation applies.

For solopreneurs, the takeaway is simple: almost everything you withdraw from your S Corp is a distribution. That means you can plan around pass-through income, avoid the extra corporate tax layer, and keep compliance straightforward.

Paying Yourself After Switching to an S Corp

When you become an S Corp, the IRS requires you to start paying yourself a reasonable salary for the work you do. This salary runs through payroll and is subject to Social Security and Medicare taxes, just like any other employee paycheck.

After your salary and business expenses are covered, the remaining profits can be taken as distributions. Distributions aren’t subject to self-employment tax, which is where most of the tax savings come from when you choose S Corp status.

Keep these points in mind:

• Salary comes first: Skipping salary or paying too little can trigger IRS penalties and reclassification of distributions as wages.
• Balance is key: A good rule of thumb to follow is to allocate 40% of your net income (after expenses) to salary and 60% to owner’s distributions or vice versa. This split keeps you in line with IRS expectations while maximizing your tax savings.
• Take distributions when you want: You can take them monthly, quarterly, or as a lump sum based on cash flow.
• Stay compliant: Accurate payroll and distribution tracking keeps your S Corp in good standing.

Let’s say your business earns $100,000 this year as an S Corp:

That $60,000 in distributions avoids the 15.3% self-employment tax, putting roughly $9,000 back in your pocket before income tax.

Note: Actual savings vary by salary allocation and state taxes.

Bottom line for businesses of one: distributions avoid double taxation and avoid self-employment tax. That’s where S Corps provide their biggest tax savings

When S Corp payouts turn into dividends

If your S Corp has accumulated earnings and profits (E&P) from a prior life as a C Corp or from acquiring a C Corp, the IRS applies payouts in a specific order:

1. Distributions reduce your basis (tax-free up to that limit).
2. If E&P exists, part of the payout is taxed as a dividend (reported on Form 1099-DIV).
3. Anything above both your basis and E&P is taxed as capital gain.

For most solopreneurs, step 2 never applies but it’s helpful to know where dividends fit into the sequence.

Pro Tip: You don’t have to guess how much to take as salary vs. distribution. Lettuce calculates your optimal split, monitors basis, and generates the right tax forms automatically. Keeping you in IRS-safe territory and maximizing your after-tax income.

How to Pay Yourself as a Business-of-One

Paying yourself through your S Corp doesn’t have to be complicated. Follow these steps to stay compliant, maximize your tax savings, and stay in control of your cash flow.

1. Set your salary first: Decide on a reasonable salary for the work you perform. This keeps you on the IRS’s good side and ensures you meet the “reasonable salary” rule.
2. Run salary through payroll: Process your salary like any other paycheck with tax withholdings for Social Security and Medicare and report it correctly on payroll tax forms.
3. Take remaining profits as distributions: After salary and business expenses are covered, the rest of your profits can be taken as distributions. These are not subject to self-employment tax, which is where your major savings come from.
4. Choose when to take distributions: Unlike a paycheck, you decide the timing (monthly, quarterly, or even as a year-end lump sum) based on your business performance and cash flow needs.
5. Track and document automatically: Keep clear records of salary and distributions. Smart systems generate the required forms, like your Schedule K-1, so you stay compliant without manual spreadsheets.
6. Automate the hard parts: Platforms like Lettuce handle payroll runs, calculate your optimal salary-to-distribution ratio, and keep you within IRS guidelines.Letting you focus on growing your business, not on tax admin.

S Corp Dividends FAQ: Your Top Questions Answered

Smart solopreneurs often search for “S Corp dividends” when what they really mean is S Corp distributions. Here’s what you need to know and when the term “dividends” actually applies.

What happens if I pay myself too little salary and too much in distributions?

The IRS requires you to take a reasonable salary for the work you do before taking distributions. If you underpay yourself, the IRS can reclassify part of your distributions as wages, assess back payroll taxes, and add penalties.

Most tax pros use a 60/40 guideline (roughly 60% salary, 40% distributions) but it isn’t an IRS rule. The right number depends on your role, industry, and what you’d reasonably pay someone else to do your job.

Are S Corp dividends really tax-free?

Here’s the clarification: most solopreneurs don’t receive true S Corp dividends at all, they receive profit distributions. These are not subject to self-employment tax, which saves you 15.3% on that portion of your income. You still pay regular income tax, and if distributions exceed your stock basis, the excess is taxed as a long-term capital gain.

The term “S Corp dividends” technically applies only if your business has accumulated earnings and profits (E&P) from its C Corp years or from acquiring a C Corp. Those payouts are taxed like C Corp dividends and don’t get the same pass-through benefit.

How often can I take distributions?

You have full control. Once your salary has been paid, you can take distributions monthly, quarterly, or as a lump sum, whatever works for your cash flow. Just make sure the business has enough profit to support the payout.

Do I need to issue myself a 1099 or K-1 for these payouts?

You’ll receive a Schedule K-1 (Form 1120-S) each year that shows your share of the S Corp’s income, deductions, and distributions. Your salary is reported separately on your W-2. If you do have true S Corp dividends (from prior C Corp E&P), those are reported on Form 1099-DIV. You don’t need to issue these forms yourself. Your S Corp files Form 1120-S and generates them automatically.

Take Control of Your S Corp Payouts With Lettuce

Most solopreneurs searching for “S Corp dividends” are really looking to understand how to pay themselves smarter through a mix of salary and profit distributions. If your business has prior C Corp earnings, part of your payout may be taxed as dividends, but for most businesses-of-one, distributions are the main way to keep more of what you earn. By getting the balance right, you avoid IRS scrutiny, reduce self-employment tax, and put thousands back in your pocket every year.

Lettuce makes it simple to get started. It calculates your reasonable salary, tracks your distributions, and ensures you stay compliant with every IRS rule without spreadsheets or guesswork. What used to take expensive accountants and hours of manual work now happens automatically. Your business deserves the same strategic advantages as a big company, built perfectly for one.

Start paying yourself smarter and see your savings instantly with Lettuce.