An S Corporation’s income, losses, deductions, and credits pass through to its shareholders’ personal federal income tax returns. An S Corp’s remaining profits are paid out in distributions to the company’s shareholders, who then report those distributions on their personal income tax returns.

Do all shareholders of an S corp have to take a salary?

A reasonable salary is a must The IRS requires S Corp shareholder-employees to pay themselves a reasonable employee salary, which means at least what other businesses pay for similar services.

How are you paid as a shareholder of a S corporation?

As an S corporation shareholder, you can receive profits from the business in one of two forms: as a salary. If you are a passive investor in the S corporation, not serving as a corporation officer, and not otherwise providing the corporation with any services, then most likely you’ll receive your share of the profits as some kind of distribution.

Do you have to be a shareholder of a corporation?

In that case, under IRS rules, you must receive at least some of your share of the corporation’s profits in the form of a salary. The same holds for any other shareholder-employees as well as for any corporation officers (regardless of whether they’re also shareholders).

Who is taxed as a shareholder of a company?

Courts have found shareholder-employees are subject to employment taxes even when shareholders take distributions, dividends or other forms of compensation instead of wages.

How is a C Corp dividend reported to shareholders?

A regular C corporation distributing its earnings out of retained earnings is considered a dividend. C corp shareholders receive Form 1099-DIV and they will, in turn, report the dividend on their individual federal tax return. S corporations, in general, do not make dividend distributions.