Why this matters
Distributions and wages have different tax treatment. The IRS may reclassify payments when compensation is too low relative to services. Separately, distributions should be tracked against shareholder stock basis.
Example
A sole shareholder operates the company full time, takes $80,000 in distributions and pays no salary. This pattern calls for a reasonable-compensation review and possible payroll correction.
What to review
Review work performed, comparable wages, amounts withdrawn, prior payroll returns and shareholder basis.
Official source: www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues