Looking for more news / blogs? CLICK HERE to go back to the main blog page.

Welcome back to the last blog of our 4-part series, where we continue the discussion of how business owners can withdraw money from a business with limited tax impact. Previously we reviewed the classification and structure of transactions, secondly how sole proprietors should streamline their efforts regarding bank account activity and how to best pay themselves, and thirdly the impact on partnerships.

In this month’s blog, we review how to properly pull money out of an S Corporation.

As the owner of an S Corporation, you have four ways to pull money from your business. Let’s look at these four ways and the tax impact of each.


One way for a business owner to take money out of a corporation is through wages for services performed. Wages are appropriate only for C corporations and S corporations, not for sole proprietorships or partnerships. When taking wages, owners are treated as employees and payroll taxes and income taxes are withheld. In addition, the corporation issues Form W-2, Wage and Tax Statement, to the business owner each year. In an S corporation, wages are subject to Social Security and Medicare tax of 15.3% but flow-through profits of the business are not, creating an incentive for S Corp owners to not take a wage or to take an unreasonably low wage. S corporation owners are required by law to pay reasonable wages. “Reasonable” is a very grey area but as a guideline the owner should take wages which approximate wages that would be paid for similar levels of services in other companies.

Distributions of Equity

An owner of a company is allowed to pull out profits of the S Corporation at any time. The most important thing to remember is that as an owner of an S Corporation, you pay tax on the profits of the business no matter whether you distribute those profits to yourself or leave the profits in the company. If you have multiple owners, profits MUST be pulled off the company based on ownership. For example, if an S Corp is owner 50/50 and one owner wants to pull off $1000 from the company then the other owner is required to also take out $1000 as an equal owner.

An S corporation is allowed to have only one class of stock. If an S corporation does not make distributions to all shareholders based on the percent of stock owned, this rule may be violated and the S corporation status may be terminated. The one-class-of-stock rule must be adhered to whenever making distributions from an S corporation’s bank account.

Expense Reimbursement

Reimbursing the owner for business expenses paid personally or for mileage driven is a great way to pay an owner without causing taxable income. The payment is deducted by the corporation as an expense and its not taxable to the owner. Win-Win! Just make sure you have a receipt to justify the reimbursement.


A corporation can receive loans from shareholders and on the other hand a corporation can make loans to shareholders. There is generally no taxable event when a corporation repays a loan from a business owner, and no taxable event when a corporation makes a bona-fide loan to a shareholder. However, failing to adhere to necessary formalities can put these transactions in danger, allowing the IRS to step in and reclassify the transactions, resulting in taxable income for the business owners.

If you ever have questions about the taxation of your business, please contact us with any questions! Now go make money!

Article from TheTaxBook

The TaxBook was voted the #1 Tax Research Product in the CPA Practice Advisor’s Reader’s Choice Awards from 2013-2020. Click here to learn more.



Blog by Kim Storen, EA – Tax Team Lead, Senior Tax Professional

Learn more about Kim and the rest of the Storen Financial team here.