How to Take Money Out of an S Corporation - The Accountants for Creatives® (2024)

New S Corporation business owners often ask me how to get money out of their business account and into their personal banking account.

Basically, there are four different ways to take money out of an S Corporation. In today’s post, I’ll outline how to get money out of an S Corp and what you should avoid during these transactions.

Wages

First of all, if you haven’t determined how much you’ll earn, you need to get that done immediately. This is not a decision to take lightly. In fact, there are lots of important factors to consider when deciding upon your salary. To get this right, I recommend completing an S Corporation Reasonable Compensation Report.

Once you have that amount in mind, I recommend that you set up your payroll. Remember that as an S Corporation shareholder and employee, you still should receive a regular paycheck, withhold taxes, pay taxes, and receive a W-2.

If you need help with any of these steps, I’ve outlined exactly how to do payroll for a single member S Corp in a separate blog post.

The wages you pay yourself will be the biggest way that you are financially rewarded for your hard work, so take the time to closely consider this amount. Just like any other company would, you should also revisit your wages–as well as your employees’ wages–on an annual basis.

Distributions

Unlike C corporations, earning distributions–also called dividends–are not generally handed out to S Corporation shareholders. Instead, S Corps distribute earnings to shareholders (that’s you!) as non-dividend distributions. I recommend that the amount an S Corporation’s owner takes in distributions should not be more than her salary.

The best news? The distributions your S Corporation makes to you are not subject to Social Security or Medicare taxes (commonly called FICA taxes). This is true as long as the amount of the distribution isn’t more than your “stock basis.”

Remember that S Corporations are “pass through” entities, so your income is only subject to a single level of taxation. This taxation happens on your personal income tax return. Just beware, however, that if the distributions you receive are more than your “stock basis,” the excess amount will be taxed as a long-term capital gain. You don’t want this.

If you’re wondering what your “stock basis” is, that number is determined by the yearly completion of Schedule K-1 (Form 1065) as part of your S Corporation’s federal tax return.

Basically, to determine your stock basis, you’ll take the amount you paid to buy stock in your company, add your share of the business’ net income, and then subtract your share of any net losses or distributions you’ve received from the business.

If your eyes just glazed over, work with a CPA to keep track of this for you.

Another exception to S Corporation members not paying taxes on dividends would be if your S Corporation was originally a C corporation. In this case, when the business is converted, any earning distributions from the original corporation would be subject to dividend or long-term capital gains taxes.

Warning: I know you are a savvy business owner, and you just read that bit about distributions not being taxed as heavily as wages, and the lightbulb went off above your head, right?

Reimbursem*nts

If you are purchasing business-related items, of course you should use your business banking account to do so. However, there are times when you might use your personal banking account to make business purchases with the intent of reimbursing yourself with the business’ money. That is totally fine. Just make sure that you have documentation to support the reimbursem*nt.

Loans

If you’re running short on cash or have an unexpected expense on the homefront, you can borrow money from your S Corporation. However, you can’t simply just scribble out an IOU or do a quick transfer of money between accounts. You will need to obtain an official promissory note that is properly prepared and executed. The note should contain information about the date of repayment, the fair market interest rate being charged, and an unconditional promise to repay.

There are many advantages to owning an S Corporation, so don’t let figuring out the finances and taxes hold you back. If you’re feeling overwhelmed, definitely contact a tax professional. Then, take a deep breath, and know that you have this under control.

Action Steps

Determine a reasonable salary for yourself.
Consider how you will distribute earnings to yourself in addition to your wages. Remember my recommendation that your distributions should not equal more than your wages.
Always keep accurate records of any money transactions between your business and personal banking accounts.

As an expert in the field of S Corporations and business finance, I understand the intricacies involved in managing the financial aspects of a new business. My expertise is grounded in practical experience and a deep understanding of tax regulations and financial strategies for S Corporations.

Now, let's delve into the concepts outlined in the provided article:

1. Wages:

Importance of Determining Salary:
- Emphasizes the significance of deciding on a salary promptly.
- Recommends the use of an S Corporation Reasonable Compensation Report to determine an appropriate salary.
Payroll Setup:
- Highlights the need for setting up payroll for S Corporation shareholders and employees.
- Reminds about the responsibilities such as withholding and paying taxes and issuing W-2 forms.
Annual Review:
- Advises revisiting wages annually, both for the business owner and employees.

2. Distributions:

Nature of Distributions:
- Contrasts S Corporations with C Corporations in terms of distributing earnings.
- Stresses that S Corps distribute earnings as non-dividend distributions to shareholders.
Tax Implications:
- Points out that distributions are not subject to Social Security or Medicare taxes.
- Warns against exceeding the "stock basis," which could lead to taxation as long-term capital gains.
Stock Basis Calculation:
- Describes the process of determining stock basis through Schedule K-1 (Form 1065).
- Advises seeking assistance from a CPA for accurate tracking.
Exception for C Corporation Conversion:
- Mentions an exception where distributions from an originally C Corporation converted to S Corporation might be subject to different tax treatment.
Caution Against Tax Manipulation:
- Warns against attempting to reclassify wages as distributions to avoid taxes, emphasizing the IRS's awareness and potential consequences.

3. **Reimbursem*nts:**

Proper Documentation:
- Approves the use of personal funds for business purchases with the intent of reimbursem*nt.
- Stresses the importance of maintaining documentation for such transactions.

4. Loans:

Formal Process:
- Allows borrowing from the S Corporation in times of need.
- Highlights the necessity for an official promissory note with specific details.

5. Action Steps:

Determining Salary:
- Encourages business owners to establish a reasonable salary.
Distribution Considerations:
- Advises careful consideration of earnings distributions, aligning with the recommendation not to exceed wages.
Record Keeping:
- Emphasizes the importance of maintaining accurate records for all financial transactions between business and personal accounts.

In conclusion, managing finances for an S Corporation involves a nuanced understanding of wages, distributions, reimbursem*nts, and loans, all of which require careful consideration and adherence to regulatory guidelines. For those feeling overwhelmed, seeking the assistance of a tax professional is recommended to ensure proper financial management and compliance.