How S-Corporation Distributions Can Help High-Income Business Owners Reduce Taxes (Legally)

Ginny Craig • January 16, 2026

S-Corporation salary + Distributions

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; owners often pay themselves entirely through salary, payroll taxes increase unnecessarily, and opportunities 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 owner 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; industry standards, role and responsibilities, time spent in the business, and company profitability.

A few red flags to take note of; taking distributions without paying a salary and paying 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; paying themselves incorrectly, poor or inconsistent payroll records, mixing personal and business finances, or failing 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 evaluate whether an S-Corporation makes sense and determine reasonable compensation. We will also work with you to coordinate payroll, bookkeeping, and tax planning. Finally, it is always important to adjust 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.