Episode 40. S-Corporation Distributions vs. W-2 Salary

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If your accountant is telling you to max out your W-2 salary and avoid distributions, they're literally costing you thousands in unnecessary taxes.

In this podcast I’m breaking down why taking high S Corporation distributions compared to your W-2 salary is the smartest tax planning move for business owners in 2025. Most CPAs and tax preparers get this backwards, telling you to increase W-2 wages while avoiding S Corporations distributions entirely.

The REAL reason S Corporations exist (hint: it's to REDUCE self-employment tax and payroll taxes, not increase your W-2 salary). I break down S Corp taxation, pass-through entity taxation, how to avoid double taxation, and why maximizing W-2 wages destroys your tax savings.

I share a real client example where his accountant told him to take everything as W-2 salary. This terrible advice would've cost him the Pass-Through Entity Tax (PTET) deduction, state tax deductions, and tens of thousands in unnecessary taxes, Social Security tax, and Medicare tax.

We also cover the additional tax strategies you can use when you structure your S-Corporation distributions properly. You can open doors to tax deductions your high W-2 salary is currently blocking. Plus, I'll tell you exactly what to do before year-end so you can start saving money on taxes immediately. No more overpaying because someone gave you backwards advice about W-2 vs distributions.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/?el=podcast&htrafficsource=buzzsprout

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/?el=podcast&htrafficsource=buzzsprout

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this ...

Episode Transcript

Speaker 1 (00:00):
A lot of business owners, their accountant tells
them to increase their W-2 by alot higher and leave nothing for
distribution as anS-corporation.
It should be the other wayaround.
Now, why is it a problem?
Ptet is one of the best taxstrategies for S-corporation
business owners.
It changes how you pay your tax.
If you are a business ownerwatching this, ask your

(00:21):
accountant, are you doing PTETfor me?
And a lot of accountants willtell you oh, you don't need it,
it doesn't apply to you.
Complete, complete, complete BS.
Ladies and gentlemen, speak toyour accountant and be like hey,
what is my W-2 salary at myS-corporation?
Can I lower it?
And you're not only lowering itfor the sake of Medicare tax
savings or social security taxsavings, but it's also for the

(00:42):
sake of unlocking theseadditional tax strategies.
That's why, if you don't have atax advisor, ladies and
gentlemen, I'm telling you rightnow, and I guarantee you, you
are overpaying in taxes, becausethese are simple things that
you can do in your business,literally within 30 days, to
start saving money on taxes.

Speaker 2 (00:59):
Welcome to the Tax Reduction Podcast for
money-making entrepreneurs withBoris Mushaev.
Boris has helped entrepreneursacross the United States
collectively save millions ofdollars in taxes with the power
of tax planning and advisory.
The only way you, the businessowner, can save money on taxes
is by using proactive taxstrategies, and this podcast is

(01:20):
all about saving you money ontaxes.
Boris will share with youin-depth and easy to understand
tax reduction strategies thatyou can implement in your
business within 30 days or less.
Let's jump into today's episode.

Speaker 1 (01:33):
It is okay to take out very high S-corporation
distributions compared to yourW-2 salary.
A lot of business owners thatwhen they come to work with us
for tax advisory, I notice thattheir accountant tells them to
increase their W-2 by a lothigher and leave nothing for
distribution as an S-corporation.
It should be the other wayaround.
So I'm going to show youexactly how to do that and that

(01:55):
it is okay to take outS-corporation distribution
versus W-2.
And actually, when you do dothat, what happens is that you
unlock for yourself additionaltax strategy.
So I'm going to give you anexample how a client of mine had
a 1.3 million dollar net profit.
His accountant said takeeverything out as a W-2.
He would have missed out on aPTET and you as a business owner

(02:17):
, additionally, would havemissed out on a qualified
business income deduction.
So I'm going to break down theentire thing for you so that you
can actually know what do youneed to do by the end of the
year how much distribution totake, how much W-2 to take, and
start saving money on taxes.
Now let's kind of walk throughthis tax strategy about the
S-corporation distribution.
The reason I wanted to do thisis that in the past couple of

(02:39):
months I started getting clientsin our tax advisory firm that
their accountant tells them Istarted getting clients in our
tax advisory firm that theiraccountant tells them don't take
out distribution, increase yourW-2, because they're saying
you're going to pay tax on that.
I've got a case study that I'mgoing to show you.
Now, before we get into the casestudy, I want to spend one
minute.
One minute explaining theconcept of an S-corporation.
So if you are that businessowner, and especially if you

(03:02):
have pretty good, high netprofit in an S-corporation, you
need to know that S-corporationis a pass-through entity.
Okay, it was designed for thepurposes of small business
owners so that you do not haveto pay dividend taxes, taxes on
your distribution, so there isno double taxation.
So, for example, how doesdouble taxation work?
In a regular C-corporation, ifyou had a net profit, you would

(03:24):
pay tax on the net profit, butalso when you take the money out
as distribution, you would paytaxes on it.
With an S corporation it'sdifferent.
The entire income gets passedthrough to your personal tax
return.
That means there is no doubletaxation if you take the money
out as a distribution from yournet profit.
So it is okay for you to reducedown your salary.

(03:44):
That is why S-Corporation wasdesigned.
There is no dividends.
These are just distributionsthat are tax-free from the
double taxation because it getspassed through on a personal tax
return anyways.
So now that we've got that clear, let me walk you through an
example and show you how you canunlock additional tax
strategies by reducing down yoursalary.

(04:05):
So actually I got a clienthappens to be a dentist here in
New York.
His net profit for 2024 was$1.3 million.
His accountant before he cameto work with us for his tax
advisory services said take outthe entire thing on a W-2, $1.3
million, leaving him with a zerotaxable S-corporation profit.

(04:27):
So that means there will benothing passed through to this
client's personal taxes.
Everything will be on a W-2.
Now why is that a problem?
First of all, when you're a W-2and take the money out and you
pay yourself on a W-2, you payself-employment taxes, you pay
tax on a social security andMedicare as an employer and as
an employee.
So on a $1.3 million it's$69,000 in payroll taxes,

(04:52):
$21,000 is social security taxesand $37,000 is Medicare taxes.
So that's the problem numberone.
That is the main reason why alot of S-corporation businesses
become S-corporation becausethey want to reduce down their
W-2, so they don't pay theMedicare tax.
But what a lot of people don'trealize, and what a lot of
accountants don't realize to dofor their clients, is that when

(05:13):
you actually reduce down thesalary, you unlock additional
tax strategies.
That's why if you've got,especially if you have a million
dollar S corporation business,you do need to get yourself a
tax advisor.
You don't have a tax advisor,ladies and gentlemen.
I'm telling you right now, andI guarantee you, you are
overpaying in taxes becausethese are simple things that you
can do in your businessliterally within 30 days to fix

(05:35):
it.
So let me walk you through thisexample.
So I did a reasonablecompensation for this dentist.
Okay, so he's a client.
This could work for any Scorporation, it's just in my
example it happens to be adentist.
So we did his reasonablecompensation, we ran the reports
, we did the interview, we dideverything that we needed and I
came up with a number thatbasically fits what he does,
which is $360,000.

(05:55):
That is because his socialsecurity tax is going to stay
unchanged, but his Medicare taxis now going to be $10,000,

(06:21):
which is less than $37,000.
So now, right off the bat.
By lowering down salary, hesaved $27,000.
The entire 930, excuse me,$940,000.
Yes, you can take it out as adistribution.
He's like Boris, it's notpossible, is it true?
I'm like absolutely, and he'snot the only client that said
that.
I'm like yes, if you have$940,000 left as your net profit
in your S-corporation and youalready paid yourself a

(06:44):
reasonable compensation, you canabsolutely pay yourself $940 as
a distribution.
He's like Boris, I can justlike transfer a check.
Yes, you can transfer, wiretransfer.
Write a check, do Zelle.
However, whatever works for you, okay, and you can do this on a
monthly basis, whatever worksfor you, okay.
So we have unlocked that.
And he was like very surprisedand I said look, this is what

(07:06):
the S corporation is.
We, we followed the law.
You have a pretty high,reasonable compensation.
Now, a lot of people may evenargue that this is too high.
Well, there are otherstrategies that we're using for
him.
Why we wanted it to be thishigh.
But based on the fact what hedoes in his business in New York
State, this came out to be areasonable compensation.
I was happy with it, he washappy with it, and now we moved

(07:29):
on.
Okay, now that you understandthe difference.
What's how this is?
Okay, let's talk aboutadditional tax strategies and
we'll be right.
We'll be back right after thisbreak.

Speaker 2 (07:40):
If you have a tax preparer and you do not have a
tax advisor, the only way youcan save money on taxes is by
using proactive tax planningstrategies that only a tax
advisor can give you.
Bora's put together a free PDFfor you, the business owner
Seven tax write-offs everyS-corporation business owner
must know.
In this PDF you can find seventax strategies that you can

(08:04):
start using in your business toinstantly start saving money on
taxes.
Click on the link in thedescription below for a free
download.

Speaker 1 (08:11):
All right, now that we are back, let's talk about
PTET.
What is a PTET?
Ptet is a pass-through entitytaxation.
Ptet is one of the best taxstrategies for S-corporation
business owners because when youpay your state income taxes,
you have a limitation.
With the big beautiful bill,that limitation went up to

(08:32):
$40,000, but you also haveproperty taxes.
You also have local taxes.
Any taxes that are capped bythe limitation okay can now be
deducted as a business expense.
So in this scenario for 2024, hewas paying a lot of state
income taxes on a W-2, which wascapped right.
So he's in the state of NewYork.

(08:54):
His state tax was $130,000.
He could not deduct $130,000.
He was only able to deduct$10,000.
So, because he now has a profit, we said you know what You're
going to pay, what's calledpass-through entity taxation.
Because pass-through entitytaxation, it changes how you pay
your tax.
Instead of paying a personalincome tax, we start paying a

(09:14):
business income tax.
So no more personal income tax,because he's going to get a
credit for it, and now there isa business income tax.
Why does it make a difference?
Because the business income taxis a business expense, because
it's paid on the state level andthis becomes tax deduction.
So remember the $940,000 thatwe had for this client.
Well, guess what?

(09:35):
The $940,000, it was subject to10% PTET tax.
That is $94,000 and that savedhim $33,000 on taxes.
So $27,000 on Medicare taxesplus we've got $33,000 on PTET
taxes.
So if you are a business ownerwatching this, you are in a

(09:58):
similar situation, or your netprofit is $800,000, whatever
that may be, just know.
And if you're already doing theW-2 salary for yourself and
it's reasonable, and you're likeBoris, my W-2 is solid ask your
accountant, are you doing PTETfor me?
And a lot of accountants willtell you oh, you don't need it,
it doesn't apply to you.
Complete, complete, complete BS.

(10:18):
Okay, every business owner.
It applies to every businessowner, especially if you're
taking a standard deduction.
All right, it works even better.
So, ladies and gentlemen, speakto your accountant about that.
Now the second tax strategy thatis being unlocked is qualified
business income tax deduction.
It did not unlock for my clientbecause he's a dentist and

(10:40):
dentists are what's consideredspecified service, trade or
business.
You don't get the QBI if you'reover certain income thresholds.
Now this usually applies tomedical professionals,
accountants and attorneys.
So if you are in that category,this doesn't get unlocked for
you if your income is in thisrange.
But if you're not in thatcategory, well guess what?
We have what's called aqualified business income

(11:01):
deduction, which is 20%.
It's 20% lower of your taxableincome or business profits.
Usually, business profits arelower than your taxable income
because you've got W-2 and othersources of income.
So, for this example, if thisis you, we'll take $940,000,
multiply that by 20%.

(11:21):
This is literally a free giftfrom the IRS.
20%.
That gives you $188,000deduction, which will save you
$66,000.
So if my client was not an SSTB,this is another thing that I
would have triggered for him,bringing total savings to
$126,000.
In his case, though, it was only$60,000, because the $66,000

(11:42):
doesn't apply to him, becauseIRS apparently thinks that
doctors, attorneys andaccountants are very, very rich
people, and when you startmaking over a certain threshold
I think 400,000 and change, youdon't get the QBI deduction.
Well, that's government'sopinion and that's what happens
here.
But in your case, if you arethat business owner, that is not

(12:03):
an SSTB, which is even moreamazing.
So you've got to work with yourtax advisor.
Be like hey, what is my W-2salary on my S-corporation?
Can I lower it?
And you're not only lowering itfor the sake of Medicare tax
savings, for the sake of SocialSecurity tax savings, but it's
also for the sake of unlockingthese additional tax strategies.

(12:23):
And again, ladies and gentlemen, it is totally okay if you take
out S-Corporation distributionsthat are a lot higher than what
you pay yourself on a W-2,because that is the purpose of
the S corporation.
I hope this was helpful.
Thank you so much for watchingand until the next time.

Speaker 2 (12:42):
That's it for today's episode.
Be sure to check out thedescription below for some free
tax reduction resources thatBoris put together for you.
If you're ready to work with atax advisor on your tax planning
, be sure to schedule your callby heading over to
wwwtaxplanningcallcom.
That's wwwtaxplanningcallcom.
And be sure to subscribe to ourpodcast to be notified when the

(13:03):
next strategy is released.