Tips for Transferring Money Out of Your S Corporation - The Harding Group (2024)

FAQs

What is the best way to take money out of an S corp? ›

Distributions Are Key

Another way to transfer your money from your S corporation to another account is via distribution. In fact, unlike C corporations, S corporations are uniquely designed to help encourage the distribution of earnings among shareholders — you — the owner.

A shareholder distribution is a payment from the S corp's earnings taxed at the shareholder level. In other words, shareholder distributions are not recorded as personal income or subject to Social Security or Medicare taxes. Shareholder distributions are not meant to replace a reasonable salary as required by the IRS.

The two ways to take earnings out of an S corporation are either as earned wages required when corporate officers perform services for the company or as shareholder distributions. Profits are attributed to shareholders at the same percentage as each shareholder's percentage of ownership interest.

One of the tax loopholes with S corporation status is that the business owner can avoid self-employment taxes apart from Social Security and Medicare.

What is the 60/40 rule? The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.

You are allowed to withdraw money to a personal account from a business account whenever you want. Also, there are many reasons why you may want to withdraw money to your personal account. This includes paying a salary and receiving dividends.

Getting paid

At a minimum, pay yourself quarterly to stay on top of your tax obligations. For a draw, you can just write yourself a check or electronically transfer funds from your business account to your personal one. A salary is more complicated because you have to withhold payroll and income taxes.

If you're moving money between accounts in your name at the same bank, you just need to know which account should send the money and which one should receive it. You can log in to online or mobile banking, select the transfer option, then choose each account from the menu.

The S Corp 50/50 Rule

Profit split evenly (50/50) between salary and profit distribution is one way to avoid leaving any money on the table. For example, if an S Corp owner earns $50,000 annually, they'd pay themselves a $25,000 salary and $25,000 profit distribution.

How do owners of S corp pay themselves? ›

An S corp offers business owners three ways for paying themselves: distributions, salary, or a combo of both. Choosing which option is best has a lot to do with how you contribute to the company and how well the business does financially.

The owner's draw method offers a greater level of flexibility than the salary method; draws can tie directly to the company's performance. You can take draws as frequently or infrequently as you see necessary. One con to the owner's draw method is that taxes are not deducted until the end of the year.

An S corporation is a corporation with a valid "S" election in effect. The impact of the election is that the S corporation's items of income, loss, deductions and credits flow to the shareholder and are taxed on the shareholder's personal return.

S corporations, in general, do not make dividend distributions. They do make tax-free non-dividend distributions unless the distribution exceeds the shareholder's stock basis. If this happens, the excess amount of the distribution is taxable as a long-term capital gain.

Once a valid S corporation election is terminated or revoked, the corporation or any successor corporation is generally prohibited from making a new election for five years. The five-year period begins with the tax year after the first tax year for which a termination or revocation is effective (IRC § 1362(g) ).

Because of pass-through taxation, the S corporation doesn't pay federal income tax on its business income the way a C corporation does. Instead, business income, deductions, losses, and other tax items flow through (or pass through) to the business owners (e.g., the shareholders).

The S corp income tax rate refers to the federal, state, and local individual income taxes that S corporations are required to pay. Owners of S corporations need to pay 0 to 13.3 percent state and local income taxes and a top marginal rate of 39.6 percent for federal personal income taxes.