TL;DR - S Corp owners have two streams of income from their business. A paycheck as an employee of the business (it's required) and the business profits as the owner. You take the profit out by transferring funds to your personal checking account, the transaction gets categorized in your bookkeeping as a Shareholder Distribution.
Getting Paid! The comprehensive guide to getting money out of your S Corp
So you have a business, you have clients, payments are coming in, now how do you get the cash to spend it! S Corp owners' income is a hybrid of your life as a W2 Employee and your time as a 1099 Contractor.
How Money Flows Through-
First, when a payment arrives, it lands in your business checking account. This is "Gross Income" to the business. From your gross income, you will need to pay your employees or contractors, NOT YOURSELF. What's leftover is your "Adjusted Gross Income" for the business. (Not to be confused with the AGI on your personal tax return)
From the business's Adjusted Gross Income, business expenses, such as internet, cell phone, subscriptions, etc., are paid. 'Please see our article on Common Business Expenses.'
The money left over after your business expenses is your "Gross Profit". That means you'll pay tax on everything else. (Unless you depreciate assets, but that's a conversation for another time)
The gross profit covers your payroll and non-cash compensation. Non-cash compensation is your Health Insurance, for example. This is your first stream of income; your paycheck. What's left in the business account is your "Pre-Tax Net Profit". Some will be retained as an "Operating Budget" to cover future expenses, but the rest is yours.
Anything in excess of your operating budget can be distributed as needed; I like to recommend at least monthly distributions, but it's up to you. A "Shareholder Distributions", the formal classification for bookkeeping, accounting, and taxes, is simply a transfer of money from your business account to your personal account.
*Important Note* - Distributions come from your profit in the business account. The Profit is taxable if it's in the business account or distributed to your personal account. A Shareholder Distribution does not make the money taxable, it was already taxable. Estimated Tax Payments will be made quarterly on your Net Profit. Please see 'Shareholder Basis'.
Let's break it down and focus on the revenue streams...
As an employee of your company, you get a paycheck monthly or semi-monthly as compensation for the work you performed. No work, no paycheck.
The money will be taken from the business account by Gusto and direct deposited into your personal account. From your paycheck, Income Tax, Social Security, and Medicare will be withheld. Gusto will send it to the IRS on your behalf and will handle the payroll tax filing (Form 940/941).
Business Owner Portion-
After you've paid your contractors, your employees, your expenses, and yourself, hopefully, there is money left over. This is your Profit! The reward of building a great business.
This profit is TAXABLE! It will show up on your personal return if you take it and spend it or not. So, take it out. Spend it, invest it, it's your money. 'Keep in mind, some of it goes to the IRS and State'.
When you take it out, that is done by transferring the funds from your business account to your personal account. Your Accounting Team at Collective will help set up a Quickbooks Rule so that these transactions are auto categorized as Shareholder Distributions. You can take distributions from the business profit!
If you need some money back in the business, you do the reverse. Transfer it from your personal account to the business checking and it will be categorized as a Shareholder Conribution.
You earn income and get paid = Gross Income
You pay your employees and contractors (Not yourself) :
Gross Income - Payroll = Adjusted Gross Income
You pay your expenses:
Adj. Gross Income - Expenses = Gross Profit
You pay yourself:
Gross Profit - Owner Compensation (paycheck) = Pre-Tax Net Profit
You pay your estimated taxed
Pre-Tax Net Profit - Taxes = 🎉 Business Profit 🎉
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