"We have to increase payroll? right?"

You have to create the first paycheck. There is nothing to increase.

I somewhat disagree with Jim for how to handle the rest of the year, since it is not year end already. I don't support more taking (3 remaining months) unless it is through payroll (or at least some of it), because technically, there should be ongoing payroll if there is ongoing taking.

Waiting to take a year end distribution would get around that perception (as long as it doesn't appear to be a bonus that should have run through payroll), so I would counsel the client not to take more until year end, if we are not also making paychecks and if we want to establish (in his example) $125k as the yearly salary.

On the bright side, you can set $125k as your reasonable compensation, and take twice that in a good year, through payroll, without having any issue that starting in 2024, you are going back to using a base salary of $125k. In other words, perhaps 2023 will be "base" of $125k + $95k as "grossed up" bonus to be able to repay that Shareholder Loan.

It just depends on the financial resources, because all of this is going to result in both the employee and the employer paying payroll taxes. And if he established a wage-related retirement plan or other benefit package, that needs to be factored into all of this.

Another "on the bright side" consideration: if he has been paying estimates, you can set his Fed Income Tax withholding to $0 for 2023 and change the W4 for 2024.