The first 10 years I was using S-Corp for "Side gigs". I did not take distributions or salary for like 8 years. The next 4 the income increased and I took a reasonable salary and very little distributions. In 2019 I will probably net only $2000 because I did not do anything in the S Corp. I do not want to take a salary on $2000 as the fees are ridiculous for that little payroll. My question is I have a lot of money from the last 14 years that I already paid taxes on. Can I take them as distributions (retained earnings) this year without a payroll in 2019? It doesn't seem right if you earn $1,000,000 in a year and take $100,000 salary but leave the $900,000 in the account for future years that you would have to take a payroll in a year with no earnings just so you can access the $900,000. It does make sense that you would have to take a salary in a year you are taking distributions IF you have net income to justify it.
Payroll vs Distributions
Answers
Owners of S corporations can choose to take their compensation either as payroll wages or as shareholder distributions. While standard payroll wages are subject to federal payroll taxes, including income taxes and Social Security contributions, shareholder distributions are exempt from these taxes and are taxed at a lower rate. The Internal Revenue Service requires that shareholders take a "fair and reasonable amount" of their compensation in payroll wages.
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