Help me understand S-Corps better

[Sean H.]

As it relates to being the sole owner of the "corporation."

So, for my question lets say i hypothetically made 100k for the year. I read that is best keep wages and distributions equal to avoid a red flag from the irs. So, 50k in wages and 50k in distributions.

 I understand wages are taxed with full SE taxes. So income plus 15.3%, but what confuses me is distributions. I have read they are exempt from SE taxes, but how exactly? Would the distributions stay in my S-corp checking account? 

Also, how does it all relate to the corporate federal tax, and in my state (NC) the 2.5% corporate tax?

I guess i'm really trying to understand if i'm really saving on taxes converting my sole proprietorship to an S-corp?

[David M.]

@Sean H.

The irs requires that S Corps pay their members a “reasonable salary.” That is subject to all taxes. After that, you take the rest of the funds as dividends. Dividends are not subject to SE taxes (maybe you’ve received some dividends from stock investing). The main advantage of electing to be taxed as a S Corp (remember it’s a tax status, not a legal entity) is saving the SE taxes on the active income over and above the irs mandated “reasonable salary.” So, it only makes sense to make the election if you are making a good deal of active profit (please don’t tell me you have passive income...) where you are saving th 15.3% is worth the extra expense.

I've never heard of a magic ratio or anything about a distribution / owners draw (regular LLC's do that).

Talk to some qualified professionals. Good luck