Why Can't an S Corporation Owner Take Everything as a Distribution?
A shareholder who performs substantial services can also be an employee, and wages cannot simply be relabeled as distributions.
Wages
Reasonable compensation for services generally must be treated as wages under applicable tax rules, triggering payroll tax, withholding, and employment tax reporting.
Distributions
S corporation distributions follow different tax rules and do not replace the wage requirement for services performed.
Why taxpayers care
There can be tax incentives to characterize payments as distributions rather than wages, which is why reasonable compensation receives scrutiny.
Factors
Relevant facts can include duties, experience, hours, industry compensation, company size, and comparable salaries.
The takeaway
S corporation owners cannot simply relabel compensation for services as distributions to avoid employment taxes.
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FAQ
Does every S corp shareholder need wages?
Not merely because they own shares. Services performed matter.
Can distributions still be made?
Yes.
Is there one universal reasonable salary percentage?
No.