Taking distributions from your S corporation can be a game-changer for your financial strategy as a business owner. Done right, it helps you maximize tax benefits, keep your business running smoothly, and put hard-earned profits in your pocket. But when is the right time to take distributions, and how do you ensure you’re doing it the smart way?
Unfortunately, many business owners struggle to get this right because they don’t understand the rules—or worse, they overlook important details that could lead to IRS scrutiny.
Why So Many Get It Wrong
The Top 5 Reasons Business Owners Struggle with S Corporation Distributions
- They don’t understand the difference between salary and distributions.
- They fail to pay themselves a reasonable salary before taking distributions.
- They assume they can withdraw money anytime without consequences.
- They overlook the tax implications of improper distributions.
- They don’t have a financial system in place to track profits and cash flow effectively.
The good news? You don’t have to fall into these traps. Let’s walk through how to take distributions from your S corporation the right way, step by step.
Pay Yourself a Reasonable Salary First
Why is this important? Because the IRS is watching. S corp owners are required to pay themselves a reasonable salary before taking distributions, and failing to do so can lead to penalties.
A reasonable salary should reflect what you’d pay someone else to do your job. For example, if you run a marketing agency, research what a comparable marketing director earns. If you’re underpaying yourself on salary and taking big distributions instead, the IRS could reclassify your distributions as wages—and hit you with back taxes and penalties.
Pro Tip: Set your salary in consultation with a CPA to ensure it aligns with industry norms and satisfies IRS requirements.
Monitor Your Business Cash Flow
Here’s where many business owners go wrong: they focus only on their bank balance. While it might be tempting to take a big distribution when your account looks healthy, this approach could leave your business strapped for cash when it needs it most.
Instead, track your profits and expenses closely. Use accounting software or work with a professional to understand how much profit your business is generating and how much it needs to reinvest. Only take distributions from actual profits—not from cash needed to cover upcoming expenses.
Pro Tip: Create a budget for your business and set a schedule for when you’ll review your cash flow and decide on distributions. Check out our article on setting a growth-focused budget for your business.
Time Your Distributions Strategically
Timing is everything. Taking distributions at the right time can keep your business stable and your taxes manageable. For example, some business owners wait until the end of each quarter to assess profits and take distributions. Others prefer annual distributions after closing out the books for the year.
The key is to plan ahead. Regularly review your financials with your CPA to decide on the best timing for your business. This ensures you’re not only staying compliant but also setting yourself up for long-term financial success.
Pro Tip: Coordinate your distributions with your tax planning strategy to avoid surprises at tax time.
Final Thoughts
Taking distributions from your S corporation isn’t just about pulling money out when you need it. It’s about understanding the rules, planning strategically, and keeping your business financially healthy. By following these steps, you’ll avoid common mistakes, stay on the IRS’s good side, and maximize your rewards as a business owner.
Take Action Today!
Don’t risk IRS penalties or cash flow issues. Let’s build a solid financial strategy together. Schedule your consultation today!
Joy Lutz, CPA, CTP
I help our client’s keep more money in their pockets by implementing proactive tax strategies.
I promise you, working with a CPA and Certified Tax Planner can be much more exciting than crunching numbers and reviewing last year’s taxes.