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If you’re a business owner earning over six figures a year in Colorado, there’s a strong chance you’re paying more in taxes than you need to — not because you’re doing anything wrong, but because your business may not be structured optimally. One of the most common (and misunderstood) strategies we see among high-income earners along the Front Range — including Denver, Evergreen, Morrison, Lakewood, and Golden — is the proper use of S-Corporation salary and distributions. When done correctly, this strategy can help reduce payroll taxes while remaining fully compliant with IRS rules. Let’s break down how it works, who it’s for, and why professional guidance matters. What Is an S-Corporation Distribution? An S-Corporation distribution is income paid to a business owner in addition to their salary. Here’s a few key distinctions: Salary: Subject to payroll taxes (Social Security and Medicare) Distributions: Not subject to payroll taxes The income is still taxable — but the difference lies in how it’s taxed. This is why S-Corporation optimization can be a powerful tax strategy for profitable businesses. Why This Strategy Matters for High-Income Earners As income grows, payroll taxes can quietly become one of the largest expenses for business owners. Without proactive planning you may run into; o wners often pay themselves entirely through salary, p ayroll taxes increase unnecessarily, and o pportunities to reduce self-employment tax are missed. By contrast, an optimized S-Corporation structure allows income to be split appropriately between a reasonable salary, and o wner distributions. This balance can lead to thousands of dollars in annual tax savings, depending on profitability. The IRS Rule You Cannot Ignore: Reasonable Compensation The IRS requires S-Corporation owners to pay themselves a reasonable salary for the work they perform. This salary must reflect; i ndustry standards, r ole and responsibilities, t ime spent in the business, and c ompany profitability. A few red flags to take note of; taking distributions without paying a salary and p aying an unrealistically low salary to avoid payroll taxes. This is why distributions should never be treated as a shortcut — they must be supported by proper documentation and ongoing planning. Who Should Consider This Strategy? S-Corporation distributions are most effective for: Business owners earning $175,000+ Profitable service-based businesses Consultants, professionals, and entrepreneurs Owners with clean bookkeeping and payroll systems It is not typically appropriate for: W-2 employees Side businesses with minimal profit Businesses without consistent income Owners who are not involved in day-to-day operations Common Mistakes Business Owners Make We often see business owners attempt this strategy without guidance, leading to issues such as; p aying themselves incorrectly, p oor or inconsistent payroll records, m ixing personal and business finances, or f ailing to revisit compensation as income grows. These mistakes can trigger IRS scrutiny and eliminate the very savings the strategy was meant to create. Why Proactive Tax Planning Makes the Difference S-Corporation optimization is not a one-time decision — it’s an ongoing strategy. At Mountain Bookkeeping & Tax Solutions, we work with high-income earners throughout Colorado to e valuate whether an S-Corporation makes sense and d etermine reasonable compensation. We will also work with you to c oordinate payroll, bookkeeping, and tax planning. Finally, it is always important to a djust strategy as income and goals evolve. Our approach is conservative, compliant, and designed to protect you while maximizing legitimate tax savings. If you’re earning over $175,000 and want to ensure your business is structured in the most tax-efficient way possible, a proactive tax strategy session can provide clarity. Schedule a Tax Strategy Session with Mountain Bookkeeping & Tax Solutions. Let’s determine whether S-Corporation optimization — or another IRS-safe strategy — is right for you.