Distribution
Definition
A Distribution (specifically a shareholder distribution) is a payment of earnings from an S-Corporation or C-Corporation to its owners. While it functions similarly to an "owner draw" mechanically (transferring money from business to personal), it has entirely different tax implications, particularly for S-Corps.
Why it matters
In an S-Corporation, owners must split their income into two buckets: a W-2 salary and a distribution. The salary is subject to 15.3% self-employment (FICA) taxes. The distribution is only subject to standard federal and state income tax—it is completely exempt from the 15.3% self-employment tax. This is the core mechanism that makes the S-Corp election so valuable for profitable businesses.
Example
Marcus owns an S-Corp that makes $100,000. He runs $60,000 through W-2 payroll as his salary (paying FICA taxes on it). Later in the year, he transfers the remaining $40,000 from the business checking account to his personal account. This $40,000 is classified as a distribution, and Marcus legally avoids paying $6,120 in self-employment taxes on that amount.