S corporations are frequently discussed as a tax-planning tool, but one of the most important operational consequences is often overlooked: owners who work in the business may also be employees of the corporation.
Salary and distributions are not interchangeable
The IRS states that an S corporation must pay reasonable compensation to a shareholder-employee for services provided before making non-wage distributions.
What affects reasonable compensation?
Relevant facts can include the owner's training and experience, duties, time devoted to the company, what comparable businesses pay for similar work, and how the company generates its revenue.
Why bookkeeping and payroll need to communicate
An S-corporation owner should be able to distinguish payroll, shareholder distributions, reimbursements, loans, and business expenses in the books.
An S-corporation election is a tax decision, not a one-size-fits-all business strategy. Owners should review entity structure, payroll, expected profit, state taxes, and administrative cost with qualified tax professionals.
Educational content: This article provides general business information and is not individualized legal or tax advice.