My business is an LLC that is taxed as an S Corp. I am the only employee/shareholder. I pass along the state’s excise tax when billing for my service Fees.
I have been using the "60 salary/40" on GROSS receipts of service Fees (including excise tax) to determine my salary and distributions.
Have I been doing this wrong? Is it supposed to be based on NET profit?
there are no fixed % or $ rules for the salary an active S-Corp shareholder should take. Rather the salary must be reasonable for the work you do for the corp. in my opinion if the S-Corp derives its income from your personal services 60% may be too low. also, what's reasonable usually depends on where your located and be within the range of what others in similar businesses are compensated. The IRS gather s data from the tax returns that are filed.
the Bureau of Labor Statistics (BLS) has much data on compensation. you can review it here
https://www.bls.gov/bls/blswage.htm
Thank you. Could you tell me please whether the amount I pay through distributions should be based on gross receipts or net profit?
You are looking at it the wrong way.
You need to determine the "Reasonable Compensation" for the 'work' that you perform for the business. That generally is on your W-2 and should NOT be determined by any random and meaningless percentages of the business income or profit.
The remaining profit (after the deduction for your compensation/wages/salary) is pass-through profit that is taxable via the K-1. That is the amount that can effectively or eventually be taken as Distributions.
there is no requirement to take distributions from an S-Corporation. You can let the cash balance grow or take what's needed to pay the taxes you owe and leave the rest. The only thing regarding distributions that you should not do is take them in excess of your tax basis. the excess would become taxable income.
I agree with the comments above.
One of the reasons people use S-corp. tax classification is to avoid paying self employment tax through K-1 distribution. So as long as your compensation is deemed reasonable, then that amount should be fixed. Any further profit will just be for your wealth building.
Further thoughts. Have you thought about creating a solo 401k plan?