This article is for S Corp members who are the only owner of their business. It covers what a shareholder distribution is, what to check before you take one, how to take one, and how to track your total. If you're on the LLC tier, your business income is reported on your personal tax return and this guidance doesn't apply to you.
What a shareholder distribution is
As an S Corp owner, you pay yourself in two ways: a reasonable salary through payroll, and shareholder distributions. A shareholder distribution is money you move from your business to yourself, beyond your salary, as a return on your ownership.
The difference matters for taxes. Your salary is subject to payroll taxes (Social Security and Medicare). Distributions generally aren't, which is where much of the self-employment tax savings of an S Corp election can come from. Taking distributions in the right order helps keep that structure working as intended and your books accurate.
| Salary | Shareholder distribution | |
| How it's paid | Through payroll (Gusto for Collective members) | A transfer from your business checking account to your personal account |
| Payroll taxes | Withheld and paid each pay period | Generally not subject to payroll taxes |
| When | On your regular payroll schedule | After payroll has run for the month |
Under current IRS guidance, an S Corp owner who works in the business is expected to pay themselves a reasonable salary before taking distributions. Make your salary the priority, and treat distributions as what's available after it.
Before you take a distribution
Running through these checks first keeps your payroll, reimbursements, and cash flow in order.
- Run this month's payroll first. Take distributions after your monthly payroll has been submitted, so your reasonable salary comes first.
- Reimburse last month's accountable plan expenses. Transfer your reimbursement for the prior month before taking a distribution, so each transfer is recorded correctly.
- Keep a cushion in your business checking account. Make sure the distribution won't drop your balance below a reasonable minimum. For many members, $5,000 to $10,000 is a good range depending on monthly salary, but choose what works for your business.
- Confirm you have enough shareholder basis. Shareholder basis is, in plain terms, your investment in the company. It determines how much you can take out before a distribution could become taxable.
If your business is operating at a loss or has taken out loans, a distribution could push your shareholder basis below zero. When that happens, the amount over your basis may be taxed as a capital gain. For more on how basis works, see our article on shareholder basis.
How to take a distribution
- Start a transfer from your business checking account to your personal checking account. Any transfer method your bank offers works.
- Use your bank, not Gusto. Gusto is for monthly payroll only, so keeping distributions out of it keeps your payroll records clean.
- Add a memo if your bank offers one, such as "Shareholder distribution." In some cases the memo passes through to Collective Accounting with the transaction, which helps your Collective team categorize it correctly.
How to see your total distributions
- Go to Reports, then All reports.
- Open your Balance Sheet and set the date you want to see.
- Find Shareholder Distributions under Equity and click it to see every transaction behind the total.
The Balance Sheet is the most accurate place to check your total. It includes corrections your Collective team makes, like recategorized transactions and reimbursements applied to a distribution, which can take longer to appear on the Transactions page.
What counts as a distribution
Money that leaves the business for your personal use is recorded as a shareholder distribution. That includes:
- Transfers from your business account to your personal account
- Personal purchases made with a business card or account
- Payments toward a personal credit card from your business account
- Personal costs paid from the business, like your home mortgage or personal income taxes
- Transfers to your personal account from a payment platform like PayPal or Venmo
These are not distributions and are categorized differently:
- Payments toward your business credit card (a transfer between your own business accounts)
- Transfers between two of your business accounts
- Business tax payments, like franchise or state business taxes (recorded as Taxes & Licenses)
- Client refunds, returned or bounced checks, and duplicate income entries
If a transaction is marked as a distribution by mistake
- Open the transaction in your Transactions tab and leave a note saying what it was.
- Choose the correct category if you can. If you're not sure which category fits, reach out to your Collective team and they'll recategorize it.
- For a transfer between two of your own accounts, check that both accounts are connected and syncing. Your team needs both sides to match the transfer, so relink any account that has stopped syncing.
FAQ
Why is my distribution total higher than what I transferred to myself?
Your total includes more than direct transfers. Personal purchases on a business card, payments toward personal bills or a personal credit card from a business account, and customer payments deposited into a personal account are all recorded as distributions.
Your total can also include activity from when your books were set up. If your Collective team included business activity from a personal account after your S Corp books start date, for example by uploading a spreadsheet or temporarily connecting that account, closing out that temporary account may have created a distribution (or a contribution) on your Balance Sheet. If you're not sure of your S Corp books start date, reach out to your Collective team.
To see each transaction behind your total, open your Balance Sheet and click Shareholder Distributions.
I took a distribution before submitting my reimbursements. What happens?
Your Collective team can apply that earlier transfer to your accountable plan reimbursement instead of treating it as a distribution. Reach out to your Collective team and let them know which transfer to apply.
Next steps
For more on how basis affects your distributions, see our article on shareholder basis. If you have questions specific to your business, reach out to your Collective team. They're here to help.
Disclaimer: The information contained in this article is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.