Distributions, guaranteed payments, and salary: what's the difference?

Three different ways money leaves your business, taxed three different ways.

Distributions

A share of profits paid to owners. In a pass-through, you're generally taxed on your share of the profit whether or not it's distributed — so a distribution is often moving money you've already been taxed on.

Distributions generally aren't deductible to the business, and they don't carry payroll tax.

Guaranteed payments

In a partnership or multi-member LLC, a payment to a partner for services or capital that doesn't depend on profits. Generally deductible to the business and generally subject to self-employment tax to the recipient.

Useful when one partner works and another doesn't, and you want the working partner compensated before profits are split.

Salary

If your entity is taxed as a corporation, owner-employees take W-2 wages, with withholding and payroll filings. Deductible to the business, subject to payroll tax.

If you've made an S-election, this isn't optional — reasonable compensation is required.

What people get wrong

Taking distributions and calling them salary, or the reverse, without the filings to match.

Assuming distributions aren't taxed. In a pass-through you're taxed on your share of profit regardless.

Taking distributions the business can't afford. Distributions exceeding basis can create tax, and distributions that leave a business unable to pay creditors can create exposure.

Uneven distributions between partners that don't match the operating agreement.

Money going the other direction has its own trap. Whether what you put in is a contribution or a loan decides how it comes back out.

What to do

Work out which route applies to your entity and how it's taxed, then be consistent about it. The problem is rarely the choice — it's taking money out one way and reporting it another.

If you have partners, check that what's actually happening matches the operating agreement.

An entity tax classification analysis covers how money should come out and what it costs.

This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.