What is an S Corporation shareholder distribution?
An S Corporation shareholder distribution is a payment of business profits to an S Corp shareholder, separate from their reasonable salary as an owner-employee. Unlike wages, distributions are not subject to payroll taxes (Social Security and Medicare), resulting in substantial employment tax savings relative to wages and operating as a sole proprietor or a default LLC. To qualify, the shareholder must first receive reasonable compensation for services performed. Late S Corporation elections allow eligible entities to access this benefit retroactively. The IRS monitors the salary-to-distribution ratio for compliance.
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