Salary, distributions, and basis: three separate conversations.

Wages pay for your services

Owner wages compensate work performed and carry payroll reporting obligations. S corporation pass-through income generally is not self-employment income, but shareholders still report their allocated taxable income.

That distinction does not eliminate the requirement to pay reasonable compensation for services. Deciding whether a payment is wages, a distribution, or something else is part of maintaining accurate records.

A distribution is a cash movement, not the tax result

The amount distributed to an owner can differ from the taxable income allocated on the K-1. Leaving cash in the business does not, by itself, prevent pass-through income from being taxable to the shareholder.

A nondividend distribution is generally tax-free only to the extent of stock basis. Debt basis does not shelter distributions. Special circumstances, including certain corporate histories, can change the analysis.

Basis belongs on your annual checklist

Shareholders are responsible for tracking their basis. A reported K-1 loss alone does not establish that the loss is deductible. Other limitations can apply even when basis is available.

Form 7203 can be required when claiming losses, receiving nondividend distributions, disposing of stock, or receiving shareholder-loan repayments. Review the current instructions for your facts.

Build a useful owner transaction record

Give your bookkeeper a clear description whenever money moves between you and the business. A transfer labeled “owner payment” leaves the classification unresolved.

• Date and amount of the payment.
• Whether it relates to payroll, a distribution, reimbursement, or a loan.
• Supporting payroll record, expense report, or loan documentation.
• Any open question that needs adviser review.