For those who want a quick rule of thumb, many CPAs suggest salary should be at least 1/3 of S Corp distributions for service-based businesses. So if you want to take $90k in distributions, your salary should be at least $30k. This isn't foolproof but supposedly comes from patterns in what triggers IRS scrutiny. Just passing along what my CPA told me!

The confusion around S Corp profit distribution formulas is totally understandable - there really isn't one "correct" equation because the IRS deliberately keeps "reasonable compensation" somewhat subjective. What I've found helpful is thinking of it in terms of what you'd pay to replace yourself. If your S Corp couldn't function without you, then most of the profit should probably be salary. But if you've built systems, have employees, or significant capital investments generating revenue, you can justify a higher distribution percentage. A practical approach: Start with market salary data for your role/industry (sites like PayScale, Glassdoor, or BLS.gov), then adjust based on your actual hours worked and responsibilities. Document your reasoning - if the IRS ever questions it, you want to show you made a good faith effort to be reasonable. One thing that's helped me is tracking what percentage of revenue comes directly from my personal work versus other factors (equipment, employees, systems, etc.). The higher your personal contribution, the higher your salary should be relative to distributions.

Quick tip from someone who's been through this: keep REALLY good records of this whole process. Save all statements showing your original contribution, the exact earnings calculation from your broker, and the full withdrawal. The IRS sometimes sends automated notices for retirement account distributions even when you've reported everything correctly. Having clear documentation makes it much easier to respond if you get a letter. I learned this the hard way and had to dig through old emails to find confirmation of exactly when I made the correction.

Just wanted to add my experience since I went through this exact same situation last year as a married filing separately filer. The advice here is spot-on, but I'll share a few additional details that might help. When you call your broker for the earnings calculation, ask them to provide it in writing (email is fine). Some brokers can be slow to respond or give you different numbers if you call multiple times. Having it documented helps ensure consistency. Also, don't panic if your tax software doesn't have a specific category for "excess Roth contribution earnings" - many don't. You'll manually enter it on Schedule 1, Line 8z as others mentioned. I used TurboTax and had to override some of their automated suggestions because it kept trying to categorize it as a regular early distribution. One thing that surprised me was that my state (Texas) didn't have any additional requirements, but definitely check your state's rules as others have mentioned. The whole process was much less scary than I thought it would be once I got organized with the documentation. Good luck with your filing - you caught the mistake and you're handling it correctly, which is the important part!

I completely understand the frustration with small dividend amounts - it feels like bureaucratic overkill for such tiny sums! But unfortunately, you really do need to report all dividend income regardless of amount. The IRS receives copies of your 1099-DIV forms, so omitting them will likely trigger an automated notice down the line. Here's the silver lining though: those qualified dividends ($340) will be taxed at the lower capital gains rate rather than your ordinary income rate, which could save you money. And that $42 in section 199a REIT dividends might qualify for a 20% deduction under the QBI rules, potentially saving you another $8-9 in taxes. So while it's annoying to deal with, you're not just avoiding trouble - you might actually be saving money by properly reporting everything. Most tax software handles this pretty seamlessly once you have your 1099-DIV in hand.

I went through this exact same situation last year with about $320 in dividends and was so tempted to skip reporting them! But I'm really glad I didn't after reading all these responses. What helped me was realizing that the 15 minutes it took to enter the 1099-DIV information actually SAVED me money because of the qualified dividend tax treatment. My effective tax rate on those dividends ended up being only 15% instead of my regular 22% income tax rate. Also, don't let the section 199a REIT dividend terminology intimidate you - it sounds way more complicated than it actually is. Your tax software will handle all the calculations automatically once you input the numbers from your 1099-DIV form. The form clearly labels everything in the different boxes, so you just need to transfer the numbers over. The bottom line is that reporting is required regardless of amount, but in your case it will likely benefit you financially too. Better to spend a few extra minutes now than deal with IRS notices later!

This thread has been incredibly informative! As someone who's new to this community and facing the 110% rule situation for the first time, I wanted to share what I learned from my recent experience and ask a follow-up question. My situation is similar to the original poster - our income jumped significantly in 2023 due to my spouse's business success and some unexpected investment gains. We made our January 16th payment to hit the 110% safe harbor, but I'm now wondering about optimizing the strategy for 2024. Since we expect our income to remain at these higher levels (or potentially grow even more), I'm trying to decide between continuing with the 110% safe harbor approach versus switching to the 90% of current year method. The 110% of our 2023 tax liability is going to be a substantial amount, and I'm wondering if it might be more efficient to estimate our 2024 liability and pay 90% of that instead. Has anyone here made the switch from using the prior year safe harbor to current year estimates? What factors helped you decide? I'm particularly interested in how people handle the uncertainty of not knowing their exact current year liability when making quarterly payments. The investment timing strategies discussed here have been really helpful too - I like the idea of building in a buffer when selling assets for tax payments rather than being forced to sell right at the deadline.

This has been such a comprehensive and helpful discussion! I'm in a very similar situation - our income increased substantially in 2023 due to my partner's promotion and some rental property income, pushing us well over the $150k threshold for the first time. Reading through everyone's experiences has been incredibly reassuring. We also made our January 16th payment to meet the 110% safe harbor, and like many of you mentioned, the peace of mind has been worth it even if we end up overpaying slightly. One thing I learned from this thread that I wish I had known earlier is the importance of including ALL tax types in the 110% calculation. I initially focused only on income tax and almost missed including the additional Medicare tax from our high income. Thankfully I caught it before making the payment, but it was a good reminder to look at the total tax line on our 2022 return. I'm also planning to implement the quarterly payment strategy several of you mentioned rather than making one lump sum in January next year. The cash flow benefits and investment timing flexibility make a lot more sense than what we did this time around. Thanks to everyone who shared their experiences - as newcomers to this income level, having these real-world insights has been invaluable for understanding not just the rules, but how to actually implement them effectively!

I totally get your frustration - it's maddening to pay tens of thousands in taxes and feel like you have zero control over how it's spent. While we can't currently direct our tax dollars to specific programs, there are actually some interesting developments happening at the local level that might give you hope. Several cities have experimented with participatory budgeting where residents vote on how to allocate portions of municipal budgets. Boston, Chicago, and New York have all tried versions of this. The results have been mixed, but it shows there's growing interest in giving taxpayers more direct input. At the federal level, you might want to look into organizations like the National Taxpayers Union or Citizens Against Government Waste - they advocate for more transparency and taxpayer control over government spending. Even if we can't choose where our money goes right now, organized advocacy can push for reforms that might give us more say in the future. In the meantime, I've found that really understanding where my money currently goes (through tools like the ones others mentioned) at least helps me feel less frustrated about the unknown aspects of it.

I completely understand your frustration - paying $42,500 and feeling like you have no visibility or control over how it's used is genuinely maddening. The lack of transparency is one of the biggest problems with our tax system. While we can't currently direct our tax dollars, I'd suggest a few things that might help: First, definitely check out some of the tracking tools others mentioned here. Even if it doesn't give you control, understanding exactly where your money goes can at least reduce the anxiety of the unknown. Second, consider getting involved in local politics where your voice actually carries more weight. Many city councils and county boards are much more responsive to individual taxpayers than federal representatives. You might not be able to influence how your federal taxes are spent, but you can have real impact on local budgets. Finally, document your concerns and send them to your representatives regularly. Even if individual letters don't change votes, patterns in constituent feedback absolutely do influence how politicians approach budget issues. The squeaky wheel gets the grease, and politicians pay attention to issues that generate consistent contact from voters. It's not a perfect solution, but it's better than feeling completely powerless about where our hard-earned money goes.