Please Help Me Understand S-Corp Distribution

[shabbado]

I would like to give myself a distribution from my company, but my accountant says that it is not the best way to go as the money cannot be deducted. I was under the impression that with a distribution, you save money on taxes since the company does not pay the medicare portion. Please help me understand this.

[Freelancier]

You should listen to your accountant and then ask questions of him/her when you aren't clear.

An S-Corp is a pass-thru tax entity. A distribution is like giving money to yourself. It's not deductible. Think of it another way: if you had a C corporation and you distribute dividends, you'd have to then claim that money as income on your personal income taxes.

The only thing a distribution does is -- if you are otherwise taking a reasonable salary -- allow you to take money out of the business without paying payroll taxes on it. That's about it.

[shabbado]

Thanks for the info. I asked questions, but it is still a bit fuzzy. So, based on your explanation, it is more beneficial to take a distribution as opposed to paying via payroll, as you save on the payroll taxes; is this correct? I do understand that I need to take a reasonable salary first, which I do.

[Freelancier]

Once you take a reasonable consistent salary, you can take the rest of profits as a distribution, yes. Your accountant will work with you to ensure you stay on the right side of IRS regulations with this.

[cpajdb]

I would like to give myself a distribution from my company, but my accountant says that it is not the best way to go as the money cannot be deducted. I was under the impression that with a distribution, you save money on taxes since the company does not pay the medicare portion. Please help me understand this.


Hi Shabbado,

I'm a CPA and it seems like something is getting lost in translation between what your accountant is telling you and what you are saying here.

If the choice is between taking the money at as salary and taking the money out as distribution, the easy answer, assuming as someone said above you are already taking a reasonable salary, is to take it out as a distribution. Salary is subject to medicaire and SS tax and a distribution is not.

I guess I don't understand what he means by it is not deductible. Any form of payment that is deductible you then have to turn around and claim as employment income, so that washes out, plus you have to pay the additional payroll taxes. From what you have described, taking a distribution is the clear answer.