Reasonable Compensation and Your S Corporation

When you incorporate your business, you create a new separate entity, and in the eyes of the IRS, you become an employee of the corporation. And this move means you must go on payroll and have all corresponding payroll taxes withheld and matched by the employer.

The owner of the S corporation is also allowed to take distributions of current profit. The distributions are subject only to regular income tax. Unlike salaries and wages, distributions are not subject to withholding or employer paid payroll taxes for the IRS or the state.

Taking distributions is therefore a more attractive, less expensive option than taking a paycheck.