As an S-Corporation shareholder, you should be on payroll with your business for a reasonable salary. This means that you will receive a paycheck which will result in a W-2 at year end. We all know that a W-2 will get reported on the personal income tax return, but what about the portion of income that was not paid via W-2?

Let's use numbers to make this easier. Let's say that your S-Corporation made $125,000. Of that, $50,000 was paid out to you via paycheck. Ignoring payroll tax and any other business expenses, your net income for the S-Corporation would be $75,000. That $75,000 is your profit that will flow through to you on your personal income via a K-1.

Many clients confuse profit and distributions. You may or may not take distributions in any given year. This would be different than that paycheck that we just referred to (gross pay $50K). You can take distributions from that $75,000 profit that you made. The key to understand is, whether you take it in the form of distributions, choose to reinvest it (i.e. capital assets)  or leave it in the company (i.e. year-end balance checking account), it was already taxable when it was considered profit, not when you take it out as distributions (assuming the two are different years).

Be sure to consult with your tax advisor if you have questions regarding how S-Corporation income is taxed.