The S corporation is one of the best tax structures going for a small business owner. Profits pass through to you, and the money you take out as a distribution isn't hit with the 15.3% self-employment tax that sole proprietors pay. That can save thousands a year.
The catch: you have to pay yourself a real salary
The IRS knows the distribution loophole is attractive, so there's a rule: if you work in your S corporation, you must pay yourself a reasonable salary (real W-2 wages, with payroll taxes) before you take distributions. You can't zero out your salary and call everything a distribution.
What counts as "reasonable"?
There's no magic percentage. You may have heard a "60% salary / 40% distribution" rule of thumb, it isn't in the law anywhere. Reasonable means what you'd have to pay someone else to do the work you actually do: your experience, your hours, your responsibilities, and what comparable businesses pay for the same role.
What to keep in mind
Set the salary based on real data, not a guess, and keep a file showing how you arrived at it. A defensible number that's documented beats a low number that isn't, every time.
The bottom line
Paid right, the S corporation salary/distribution split is a legitimate, powerful tax saver. Paid wrong, it's the single most common thing the IRS challenges on S corp returns. This is exactly what a Breadify membership handles for you, setting a defensible salary and documenting it.