Discussion:Consumer Questions on S Corp Owner Salary vs. Distributions

Do you know why we are then given an option on the pass through K1 (on the individual tax return) screen to enter self employment income, under other info (17): That section alone was part of the reason that I believed that we were able to choice the option of paying SE taxes on K1 income,as this entry generated an SE tax calculation for the taxpayer..Have I then been mis-using this option?

My question is – can he issue 1099 instead of W-2 as Director Compensation subject to SS, that way the S Corp will not pay SS and he will not pay because he already reached the cap…am I missing something?

I currently work for an employer at $58.00 per year w-2. I have an offer of $60.00 on a 1099 basis. I am wondering that if my comapny makes the $60.00 per hour and I paymeself a reasonable salary such as $30-$35 an hour. Will making this move make financial sense? I am also hoping to be able to take advantage of other advantages of having an s-corp.

I know you are busy but I have that potential client awaiting my answer and I am unclear on the correct direction. Assistance is greatly appreciated.

David

"As to the second, the rules require that if there is a note document for the excess, it will be treated as cap gain, 15% plus state tax. If no note, ordinary income, 28+% plus state. Big diff."

but on this thread you state that you don't have to pay the tax. just curious, thanks man.

The reason that I ask, is that I've started an s-corp and will be paying myself an hourly rate, but I really want to minimize the rate for SS tax purposes. $23/hr is what I've originally come up with as enough to get by on while retaining the rest as profit (perhaps to be distributed in later tax years).

thanks in advance

I would be the only employee of the S Corp and would not have any expenses for 2006. Additionally the S corp will only come into existence in Nov 2006.

I understand basis to be the amount of money I have put into the company. I understand the salary/disbursement relationship to a point. It seems more applicable to an established (& profitable) company. As start-up, I was living off savings in year one (but did pay out $12k in Dec '04). In year two (having run out of savings), I paid out to myself a bare minimum (no where near a reasonable hourly wage). The amount I paid myself is less than 1/2 of what I put in (basis) to date.

What is the most tax efficient way to define the money I have taken out of the company to pay my living expenses? Should I classify some of the capital put into the company as a loan, and thus some of the money was repayment of the loan? Can I claim a higher distbursment ratio as a start-up?

I need to minimize my tax exposure for the simple reason that I am out of money. What to do?

Thanks.

So, it is ok to have zero salary combined with disbursements if the company has shown a loss? That won't set off alarms w/ the irs and be the proverbial hog?

If this is the case, I have a related question. I set up health care thru my company, and have the company pay the premium. Given a company can deduct max 30% of health insurance and the remaining 70% has to show as employee compensation, should I list the 70% as a disbursement or as compensation?

Just to be sure in calculating repayments & losses in regards to basis. If I put in $100k at start-up, lost $30k and repayed myself $30k in year 1, my remaining basis would be $40k?

If I again lost $30k in yr 2, would I then be left with a $10k basis - & if so would any repayment over $10k have to be classified as either salary or capital gains?

Sorry if this is basic for your guys, but I am just trying to be sure of the fundamentals before I bring everything to an accountant.

Your basis assumptions are correct, although from what you are saying it is unlikely you will receive re[ayment in excess of basis without income.

Is there any benefit to posting a salary in my situation (new company w/ a 2 yr loss), or should I just take money out as repayment/disbursement until either the company is profitable, or I close it up?

Myself and my husband has S corportation in which he is acting as an independant consultant and I am the 100% shareholder. He is getting 1099misc for 40000 out of 80000 that we made in a year. Since I am working as a full time analyst in a corporation and not 100% actively participated in the business, I did not give any w2 to myself and thinking about distributing $40000 as dividend. Is there any other way that I can treat this amount? Can I retain part of this money and distribute only $20000 to my self as dividend?

I have always been very confused as to how to treat the checks my husband writes to himself. I apply them to the money owed by the company for the above mentioned expenses, and apply the difference to salary, figuring out the payroll type taxes from the difference amount. Earlier this year, I spoke to the IRS to get some clarification as to whether or not this money is considered salary or something else (an accountant we went to said we should treat as distributions). She said my husband was not considered an employed, changed it in our files and told me I did not have to file anymore 941's. I was quite pleased to hear this, but it just didnt seem right to me. After reading the above threads it seems I will have to go back and file these quarterly reports!?

My questions are: 1. If the company is only bringing in a small income, shouldnt his salary be proportional to the income? If he was working for an established design firm he would be making much more, but he is also an artist so divides his time between both the company and his art. 2. As the sole employee are we responsible for federal and state unemployment taxes? 3. Does the "salary" we pay to my husband have to come in some sort of normal, weekly/bi-weekly fashion verus the checks he writes when he needs it? 4. Whats the best way to go about paying my husband?

Thank you very much for your time.

Regarding reimbursements, profit draws and salary... Since he pays himself so nominally can we call that money profit draw (I am assuming reimbursements is reimbursment for capital put into the company?) and just report it as personal income, bypassing the payroll taxes?

I really hate those quarterly filings, and the penalties I end up paying by filing late is seeming to offset the benefits of having the S-Corp.

Any reading material, websites, etc you could recommmend on how to correctly go about doing our books, salary, etc. would be most appreciated. I have been learning as I go along but would love to have a more definitve formulas and methods to attacking our business accounting. It is always a worry for me whether I am doing things correctly.

Thanks again!

Before any profit can be taken from the business, there must be p/r. Your husband is an employee of the s corp, in if p/t. All p/r taxes must be paid.

You can take profit from the AAA acct if there is any. Since the prior years had a loss, the AAA a/c may still not have a profit.

You can't reimburse for capital. If there is a shareholder loan acct, you can get a reimbursement from that so long as the acct has a credit bal.

Reimbursement of expenses is fine if you keep expense reports and do it on a regular periodic basis.

If the s corp pays for se health ins, that must also be added to the w-2, without any w/h.

There are many issues here any a non prof can get into trouble.

You need professional help.

Income/Losses below are after salary, if pd. Distributions paid are after salary.

Client started bus in 2002:

2002, Net Loss ($10,000)$00 salary,$00 distributions

2003, Net Inc $20,000, $00 salary,, $00 distrib. (repaid loan to SH)

2004, Net Inc $87,000, $00 salary!! $26,000 distrib.

2005, Net Loss($6,000),$20,000salary, $41,000 distrib.

2006, Net Inc $5,000, $30,000 salary, $2k distrib.

They have NOT filed 1120S or 1040 since 2002!! (lucky me, that's my job!)

I have thought about filing 941's as follows:

2003 w/$5k in salary

2004 w/$10k in salary (as a warm up, new business, just starting to be profitable).

They just take the hit on late filing, late pmt penalties to avoid the $0 salary in 2004 and all the distrib being deemed salary, which I have heard could happen, but have not seen discussed here. I know $10,000 in salary may sound low, but I have to weigh the risk of a low salary, w/all the penalties on the late 941.

But, if they had no distrib in 2003 (they repaid loans to SH instead) and after reading all your great comments, I am starting to think it may not be necessary to file a (very late!!) 941 2003 and I could suggest a $15,000 salary in 2004 instead.

At least they haven't filed the returns yet! Thanks for your help & suggestions!

The company continues to be profitable in '07 and will begin making payments to owner/officers. So I'm looking for tax advantaged way to pay out, both the retained earnings now, and profits throughout '07, using 50/50 split to start.

Can the retained earnings be divided & assigned to owner equity accounts giving each $6500 in equity - and subsequently, can $5k be pulled out from owner equity account w/o tax liability? If not, how is this classified and what solution?

As for regular payments, the salary portion is obviously subject to payroll taxes & reporting, but what about the distributions? Does the corp have to withold/pay anything on those or just rite checks and report distributions at end of year? 1099-div?

I'm new to this so thanks for your patience and insight.

$15k of retained earnings in '06, reported on 1120s/K-1s. What is best way to pay it out now?

For future payments to owner/officers, at 50% salary/50% distribution (see the math), I understand salary subject to P/R withholding/reporting. Question is what about distributions?

JR1/Kevin - Using ratios is indeed a specious approach, albeit one used by many tax professionals. I realize the owner salary must be appropriate for job function and industry. In a scenario where SMBs have regular income and can draw a regular salary, the remaining profit as a distribution at year end is more obvious.

But what about a biz with sporadic work, i.e project related and/or part time w/out sound annual income projections? Should an owner be expected to draw a regular salary throughout the year and potentially end up w/no distributions, even though a distribution would be in order based on work done and level of profit? Or should the owner draw some distributions as well throughout the year based on the profit above and beyond the appropriate salary for each project?

Thanks, Lee

im a S corp and wondering what to do: i didnt take a salary for 2006 and profit for the company was $29K

gross sales were $240K

if i put 0 as the salary - that is true as i didnt pay any taxes. yet i may get audited.

if i put 10K as the salary - that isnt true unless i pay back SS taxes - how do i do that and is it worth to pay the late fees/penalties?

i see some people saying that i need to pay that as a bonus and pay all of it as salary - but i am too late to pay tax on it -

help :)

thanks ben

You have following options: 1. file late quarterly reports, and w-2 and pay late penalties, ss and unemployment taxes 2. Write yourself 1099-misc instead, and treat yourself a self-employed this year, pay ss tax. 3. Don’t receive any compensation and treat everything as a profit from your company. Don't pay ss and unemployment taxes. The correct way is the first option: you pay here ss and unemployment tax. To avoid penalties, you can choose the second option. You pay only ss tax If you have some other income, and already paid SS tax some place else, you probably can choose the 3rd option (if your business income is not significant). You don't pay ss and unemployment tax, but you might be questioned why you didn't pay.

Sandysea, I've pretty much confused myself as well. The S-Corp is DBA under another name. So I guess the S-Corp is paying us wages since we didn't need another EIN, according to the IRS. I thought there might be a way of paying SS and unemployment taxes without going through the W-2 filings. There won't be any Federal Income taxes due. Thanks.

Normal employee pay for my spouse's occupation is 300k per yr(I guess justification behind old group?). We are starting a new business and I established an S-Corp. So workload for 2007 is maybe equal to 8 months of regular employment. However, as a new business I expect only 400k. So 300k payroll and 100 K-1 seems we are disporportionately taking a bigger payroll tax hit than necessary.

So does 60/40=240k payroll and 160k seem appropriate or hopefully less payroll? Or maybe my thought is 300k/12month=25k per month x 8 months worklaod(new business)=200k payroll and 200k K-1.

Any suggestions?

I appreciate your comments. =-)

In this case, distributions play a key role...don't let distributions be an unreasonable amount versus salary :)

This would save: .029 Medicare FICA x 48,000 + .124 Social Security FICA x 48,000 = $7,344! This correct? Thanks.

W2 or 1099 for S Corp Shareholder

Anyway:

"Can BOTH Members/Shareholders file as 1099 Contractors"

With few exceptions, no they can not.

" should we treat distributions/payments out of the SCORP as Salary?"

It depends on what the meaning of reasonable compensation is.

As for VEXED: It sounds to me that he left his job(employee non-owner) and struck out on his own. Need more facts.

You can choose to be taxed as a partnership, in which case you will get a guaranteed payment  and you will be responsible for all your p/r taxes.

Someday I will catalogue all the "IRS is getting ready to audit....." stories. Three or four years ago it was autos donated to charity for one, and see what happened? Both IRS and Congress changed the rules! This is often what happens; IRS promises more enforcement and Congress gives them tools. See JR's comments on Rangel's Tax Bill on another thread.

I have an S-Corp with 3 partners. Two of us work run the business full-time, while the 3rd is a 25% shareholder. He is basically an investor, or silent partner.

My problem is this:

All year, we have been unable to take salary because our business is new and we had a cashflow problem up to this point. Now, we are able to finally pay ourselves something, but I don't want to pay ourselves salary and have the payroll taxes taken out. My thinking is that our losses will be so great at the end of the year, that there must be a way to not have to pay the payroll taxes now.

Normally if we were equal partners, we could each take a dsitribution. The complication arises with the 3rd partner at 25%, and the other two at 37.5% each.

Is it possible to take a distribution and pay the two fulltime partners now, but not reduce our year end distribution? The two fulltime partners should be compensated for their day-to-day work, as was the reason for the salary in the first place. But to this point, was not payable due to cashflow reasons.

Am I making any sense? At all? ;-)

And no, you're not making complete sense because on one hand you talk about taking salaries, then that there'd be losses at year end, then about distributions. Where there are losses, there cannot be distributions. Whatever you do, if you take money out, you must pay reasonable salaries. If you don't want that, you're in the wrong kind of entity. After you pay salaries, whatever profit remains is split in accord with the ownership. Usually, folks working in the biz WANT a salary so that they're not compensating a silent partner for work that he didn't do. If you're scenario is a net loss, you could forego your salaries until next year, splitting up the loss by %, or you can go ahead and do salaries, and yes, the payroll taxes, increasing the loss which is then split. That loss would offset your income taxes, but not SS taxes.

Consult your accountant. Tricky choices.

Life is not fair. Compensation for services is wages. Compensation for ownership is distribution of profit. Tough thing that you have to pay payroll taxes, but that is life. Distributions get paid out of profits earned from the business, after reasonable wages have been paid to shareholder-employees.

Corp is going to show about $40k in distributions after expenses ($10,000 to me & $30,000 to her on the corp K-1).

I was hoping to absorb her distribution with some real estate passive losses, but I have heard that husband & wife both have to be material participants if one is.

Thoughts ?

John Huddleston Seattle Bellevue Tax Accountant

My partner and I each have 50% share of ownership in a s-corp. I do not want to pay payroll taxes he does. Is it possible for me to sell my shares to a LLC to avoid the payroll taxes? Or do we have to convert the s-corp as a whole to receive the benefit of not paying the payroll taxes?

$ 58,000 after allocating $ 5,000 to retirement (I'm not contributing more because I'm saving to buy a house) and leaving $ 10,000 remaining in the S Corp bank account to cover monthly expenses. Would paying myself a $ 75,000 salary and a $ 58,000 distribution potentially cause issues with the IRS given the salary amount is fairly close to the distribution amount? What do people do in my position who are sole owners of S Corps, sole employees, want to clear out the S Corp bank account at year's end (leaving enough in the account to pay upcoming expenses) but to do so they'll need to give themselves a distribution that is close to, equal to or even higher than one's salary? I feel like I'm in a catch 22. Also, does the IRS frown on S Corp sole owners clearing out the S Corp bank account at year's end or do they prefer this? Obviously, I don't want to leave funds in the S Corp account that doesn't need to be there in order to keep the business running. I'd rather those funds be moved into my personal accounts, but this means my distribution is going to be high.

JR's last point is that once you have raised your wages to $75k, arguing that a lower amount is reasonable becomes problematic. If last year you worked for $75k and figured it was reasonable, why is a lesser amount reasonable this year?

Ultimately, if the IRS is going to chase S corps paying low wages, there are worse offenders out there than you who paid yourself $75k. So IMHO $75k wage, $58k distrib is not likely to significantly increase your audit chances. And, if the argument does get raised, Joan's point is relevant (if she and I are interpreting your post correctly) that the distribution you are contemplating taking for 2008 is the first one you've taken in five years, so naturally there is an accumulation all coming out in one year.

At some point you might think about taking earnings above your salary out into a corporate deductible pension, like a SEP. On a 50,000 salary, $12,500 could be contributed and deducted by your corporation for a SEP contribution.

With a C corp, a salary can be deemed unreasonable if it is too high (in the eyes of the IRS). This is because the IRS wants the excess taken from a C corp as DIVIDENDS (not distributions); dividends are not deductible by the C corp, yet taxable to the individual - thus the double layer of taxation you may have heard about....

With an S corp, the IRS wants a 'reasonable' salary strictly to get payroll taxes (Social Security and Medicare cash flow into a failing system). I've never heard of the IRS determining that a salary in an S corp situation is TOO high (anyone else ever heard of it happening). Your personal income tax liability isn't changed by your S corp salary vs distribution (disregarding the impact of the payroll taxes paid by the S are deductible).

Hope I'm interpreting your questions correctly and that this helps.

Death&Taxes, it is a service business with significant expenses and very limited capital invested. I'm not in a position to take a nice chunk of earnings and allocate them towards a retirement fund because I'm in the process of buying a house and need as much personal income as I can.

Belle, understood. My concern is if my “reasonable” salary is $ 75,000, then to essentially clear out my S Corp bank account this would mean my distribution would be close to, equal to or perhaps higher than my salary (which the IRS doesn’t seem to like), and not being in a position to put funds into an SEP. Thus, I feel stuck in a position where my distribution is going to be on the high side over and above salary in most years and that’s what the IRS doesn’t like, but I don’t see any solution to it other than contribute to a SEP (not an option currently), so then that’s my quandary.

Any further suggestions/concerns per my posting directly above (my second posting of the day)?

I'm surprised to read how much can someone make from this type of solo enterprise....

Second, if you are trying to up your income to buy a house, I'm assuming you are trying to qualify for the mortgage, in which case the higher the salary, the better off you are. Unless the stress towards buying the house only pertains to having cash on hand rather than what income is going to show on the application.

Either way, Cat s/b fine.

$ 134,400/Total Expenses $ 123,500. Had I been paying myself a salary of 75K in '06, I wouldn't have made enough profits to meet that salary. Should my expenses run so high that I cannot meet the salary I set for myself this year (75K) in future years, what then? Thanks for you insight. I appreciate it!

D&T - why take the chance, since she has two days to get it done? ($75000 X 153% X 10% =

      $ 11,475 minimum with no FIT w/h)

1) Currently, I am working full-time at a firm and get paid a fixed salary and I have created my own S Corp where I work about 5 hours a week. How much should I pay myself for the S-Corp? Let's say that my S Corp makes about 100,000/year and I work only 5 hours/week.

2) Also, must I pay employement taxes or should I pay myself a salary if the company has not made any revenue yet? The S Corp has only been established.

As for the second comment, I work in a different area - services. The purpose of the new venture is to only buy and sell products.

I've just set up an SCorp where I'm the sole shareholder and employee. My question in regards to the "distribution of profits".

I keep reading where a distribution is "nontaxable". I thought the distribution was taxed and your regular tax rate (less SS & Medicare)? Also, whats the difference between a distribution of profits from the Corp. to me and a "draw"? Finally, where is this reported? I know the salary is reported on a W2, but where is the distribution (and/or draw) reported...1099, W2 also??

Thanks.

I corrected it - thanks JR

Thanks again.

Distributions are shown on line 16 of your k-1 but it stays there. It nots get transfered anywhere else.

S

You can still report Q4 salary. The 941 is not due until Jan 31. You can pay employment taxes at that time up to $2500 without a penalty for failing to deposit employment taxes. If you have zero income tax withholding, your salary can be over $16,000 and your total tax will be under $2500. That's much better than zero salary. You can also pay a management fee from your corp to you and issue a 1099. The fee will be subject to self employment taxes. It's better to pay a salary than use the management fee method. However, that is a way to get the IRS their employment taxes. An auditor may be forgiving if you explain the circumstances and that you are not trying to avoid tax.

John Huddleston Seattle Bellevue Tax Accountant

ReelSafari, can I go? Oh, wait...doesn't matter. You're paid a salary. You're an officer. Officer's salary it is. And it all goes there. It must be reasonable. Reread the thread for best results...!

W-2 wages with no dividends in a failing contracting firm. Needing to report the profits from the corp for financial reasons and wanting to avoid double taxing, what route is suggested for the 104K going IN with the same 104K going to payroll? The fun part is these funds come from a seperate corp making profit from the labor only of this S Corp, but need to show up as "not-really-profit" yet cash IN and OUT for thw W2 payroll from the contacting firm. I'm pulling my hair out! This is a TODAY time frame for the owner/earner going through a refi of his house.

I have some cash lying in the S corp. I have 5 employees and pay myself reasonable salary. Can I use the cash to pay for a property that I wish to buy for myself. The objective is to save taxes - kindly advise.

As Ww suggests, don't have the S corporation buy the property unless you have a really good reason for doing that ... and it's hard to think of one ....

I'm joining an existing S-Corp which is only a year or two old, which has few/no assets, no revenue, operations, etc. It's been a sideline thing for the founder with his invention, but he hasn't really done much with it. The intent is to build it essentially from the ground up. The company has no money and I am not investing any. There is no money to pay salaries. We will be looking for investors. I have some personal resources that I can live on and I plan to work for sweat equity. I realize that the IRS says that a reasonable salary should be paid, but there is no money to pay any salary. I do not plan on investing any significant amount of money in the company. Maybe a thousand dollars, just to pay for some expenses as we try to get outside investment.

There are a couple thoughts on how I can accomplish this and I'd like your feedback. A- The company accrues an unpaid salary. (In case we have a falling out.) At some point in the future, when the company has money, I request the company use the unpaid salary to pay for the stock. At the same time, I realise that I would have to pay SE and income taxes on the then "paid" salary. Can this be done? What are the ramifications?

Can I later forgive any debt for unpaid salary without tax consequences?

B - The company gives me stock at no cost to join the company. I work completely for sweat equity until the company has money to pay some salary. If this is done, would the gains from later sale of the stock be treated as ordinary income?

C - I invest a very small amount of money to purchase the stock (par value or so). I work for no salary until the company has money to pay some.

I'd appreciate any feedback you might have. Thanks in advance.

And forgiving the debt later?

Therefore, I'll either choose B or C.

If B, is my assumption about CG vs. Ordinary Income above correct?

In case C, if I work for no salary for some time, can the IRS consider any percentage of stock sold later as OI?

Reasonable wages: for my profession, pay differs by region, hourly vs. incentive, experience, etc. often it is low with many benefits, or higher with none. the range is great and i have no idea of an appropriate amount to pay (myself.)

thoughts?

Sorry to interrupt, AGG.

JR1, I've read this full thread (~ hour,) and imho, you are most helpful in an ironically pro bono fashion.

lol,

climb

The two question I have: -Should I contest it if the Salary levels are really high. -Will this also trigger IRS audit

The two question I have: -Should I contest it if the Salary levels are really high. -Will this also trigger IRS audit

Because the business didn't have the funds available at the end of 2006, I didn't pay myself my annual salary. Without realizing how serious the consequences could be, I decided to simply pay the taxes on my distributions. I now understand that this means my 2006 corporate FICA and MEDFICA weren't paid and that the failure to show reasonable Compensation of Officers is the number one trigger for an S corp audit. (I also realize the penalty equals the taxes owed!)

I recently and belatedly filed our 2006 corporate tax return listing my distributions under both Line 7: Compensation of Officers and Line 16d: Property Distributions. Obviously, I need and intend to file an amended return ASAP, but I'm not sure how to proceed. I plan to apply a reasonable portion of my "draws" to officer compensation and the balance to distributions.

I expect to send the overdue payments and penalty along with our amended 1120S, but I'm hoping I won't have to file amended 941s for the fourth quarter and year-end, as well, though I expect that may be the approach the IRS would recommend.

I'll really appreciate advice from someone who feels they know the best way for me to proceed. I'm willing and able to pay the tax and penalty, but would like to do as little paperwork as possible. Is there any chance an apologetic letter to the IRS from a penitant idiot would fall on sympathetic ears, if it were accompanied by the appropriate payments and our amended 1120S?

Thank You in advance for your suggestions!

Or is this one where the audit clock is already ticking, you make some notes in the file to indicate you're ready and willing to do this...and wait. You likely won't get pulled anyway...just thinking out loud.

Because I didn't pay myself with a formal paycheck in 2006, I didn't pay any payroll taxes or receive a W2. I do now understand the difference between wages and distributions, but I didn't when I filed the 1120S on which I listed my $36,367 in draws on both line 7 and line 16d.

For amending the 1120S, my tentative plan is to call $22,000 of my draws 'Officer Compensation' and leave the remaining $14,367 as a distribution. I guess then, in order to then file my 1040, I'd have to issue myself a W2 showing the $22,000 of wages, but showing no payroll taxes paid. That seems an invitation to trouble for both the corporation and me personally.

Your "thinking out loud" and the statistics on audits of S corps make me wonder if I should simply file the amended 1120S listing $22,000 of wages paid to me, make sure I've declared all my income on the 1040 as draws, and then play dumb and 'throw myself on the mercy of the court' if I or the corporation ever get audited.

I would expect the IRS's computer system to immediately recognize that a corporation paid wages to its sole shareholder and he didn't declare them or file a W2. On the other hand, I don't know if it would, and I don't know how serious the consequences would be if there were an audit and I acknowledged that I'd realized there was a problem but hadn't been able to figure out what to do about it. (That really wouldn't be a lie!) What do you think?

One more question... I believe the corporate liability for FICA and MEDFICA on the $22,000 was $1,683. I read that the penalty for underpayment of payroll taxes was equal to the amount of the underpayment. Does this mean I'll owe an additional $1,683 for each year or portion of a year that passes before the problem is corrected?

Thank you for tolerating and assisting a rank novice like me! SenorN

No, payroll tax penalties max out at 10% of the tax. What you're confusing is the penalty for failure to pay over withholdings by a corp officer, and that is a 100% penalty. That's not in play here.

Buena Suerte y ¡A Dios!

I'd issue a W-2. You can use the $22,000 as the net pay and gross it up it include Fica and medi tax. The s corp did not pay any p/r tax and that is what the IRS is looking for.

By putting the wages on a sched c does not show that the liability was paid by the s corp. You need to adjust the 1120S and issue a W-2 and 941 (for the $ quarter) as well as pay FUTA and SUTA tax.

Last year I hit AMT. I know AMT may get lifted this year (passed House and about to go to the Senate I believe). Many on this forum talk about lowering their salary, or passing the muster in an audit. At close to $100k in salary, obviously I'm safe, but I have two questions:

1) Should I be at a lower pay amount thereby reducing 15+% of FICA (I believe the answer is no)?

2) A question which goes in the opposite direction - given I can only contribute 25% of W-2 income into a SEP ... should I reduce my draws, increase my salary (given I'm close to FICA anyway) so that I can increase my SEP contributions which thereby lower my K1 distribution and hence my taxable income?

I am 100% shareholder in an S corp that my wife and I work for. We take salaries that totaled $186,400 in 2007. Including the corp profit we paid taxes on $234,180. Our total tax burden state and fed was $74,000. The total taken was 100% salary 0% distribution. What steps can I take to lessen my tax burden? Should we do the 60/40 that I read about on this site? Can I setup a 401K or some other retirement through the corp? Thanks

There are a variety of pension plans. I don't know which one would be best for you and your s corp.

My business has fallen off over the past few months, but I am way ahead for the year. Looking at my 2007 return I will be paying similar taxes for 2008, taxes that I will not be able to pay because I will lose around $50,000 per month for the remainder of the year. With the housing market slowing down my checking account is dwindling fast.

The 35% that I pay now is hard to swallow. The 50% that the dems may take will put me out of business.

Semi-retired sole proprietor that has a personal income tax preparation service. Work out the house (home office expense) and pay one employee (spouse is paid via W-2 salary to maintain eligibility for “Group” med insurance rate) and an independent contractor (Form 1099). Gross is about $40,000 and net profit about $25,000. Other expenses are minimal to none (primarily ProSeries tax prep software and office related expenses). Been paying the 15.3% SE tax on the $25,000 but after reading all these blogs, it might make sense to establish an LLC, elect S Corp status instead of being a “disregarded entity”, and pay myself a $15,000 salary, with the remaining $10,000 being distributed on the K-1.

At this point in my life, I don’t need IRS problems but saving the SE taxes would definitely help my cash flow because my 401-K is now a 201-K. For the past 20 years, my tax practice has always been a second job, but now being “retired”, I will have the day time to take on more clients. The practice is mine, as is a 100% of the revenue stream. I do 100% of the client interviews and pay my Form 1099 contractor 20% of the prep fee to input the data, print and package those returns he works on. But it’s my name and PTIN is on every return. My wife’s salary is strictly for her admin duties (phone calls, filing, etc) so she also does not directly impact the revenue stream.

And as my gross increases, the potential K-1 benefit would increase 80% to 90% because expenses are relatively fixed. Can I justify the partial reallocation to a K-1? Don't mean to sound pretentious, but without me, there is no tax practice. What would you do?

Is our accountant too conservative, or perhaps lacking knowledge on how to help an S-Corp reduce tax burden? We get KILLED on taxes every year and I really want to shelter some of that money. How much do we save on taxes if we pay ourselves only the FICA limit (which is approximately a reasonable salary for what we do) and the rest in distributions? Is there any tax advantage to paying out more than the FICA limit?

Any advice would be greatly appreciated!

Any advice would be appreciated.

TP, if you're reasonable salary is over the SS ceiling anyway, it's a good play to max the salary for retirement, then. You're only using the medicare tax cost to save a ton of income tax.

TT, sorry, didn't read. Ask your tax pro.

An S Corp must distribute based on ownership, so I am curious how only one owner received a distribution. Are you sure that is what it was, a distribution and not a shareholder loan? Also, was there a vote on the distribution? What about annual meetings? Do you receive copies of the corporate financials? Are they audited?

My recommendation would be as JR1 stated above, you really do need to discuss this with your tax professional. Something does not "smell right" and when that happens I usually start uncovering much more. I would talk to a CPA or Tax Attorney at this point.

Also, as an S Corp, that employee/participant/owner hopefully is taking out a reasonable salary. You mentioned he takes out $5-15K a month in "various ways". There could be another problem if the salary is not reasonable. In an audit IRS would just recharachterize the transactions, and then the company has to deal with back payroll taxes...interest and penalties. You REALLY want to get some professional advice on these issues.

This TaxAlmanac Forum is GREAT with discussing tax issues and bouncing ideas around among the experienced tax professionals and sharing experiences with one another. However, once I hear their viewpoints I still continue to research for I need tax authority to back my final decision on whatever tax position I take. If you are a professional then you know what I mean. If you are not, then please, seek the advice of one right away. Ask for a professional who specializes in SCorps.

Hope this helps,

Diane Offutt

An S Corp must distribute based on ownership, so I am curious how only one owner received a distribution. Are you sure that is what it was, a distribution and not a shareholder loan? Also, was there a vote on the distribution? What about annual meetings? Do you receive copies of the corporate financials? Are they audited?

My recommendation would be as JR1 stated above, you really do need to discuss this with your tax professional. Something does not "smell right" and when that happens I usually start uncovering much more. I would talk to a CPA or Tax Attorney at this point.

Also, as an S Corp, that employee/participant/owner hopefully is taking out a reasonable salary. You mentioned he takes out $5-15K a month in "various ways". There could be another problem if the salary is not reasonable. In an audit IRS would just recharachterize the transactions, and then the company has to deal with back payroll taxes...interest and penalties. You REALLY want to get some professional advice on these issues.

This TaxAlmanac Forum is GREAT with discussing tax issues and bouncing ideas around among the experienced tax professionals and sharing experiences with one another. However, once I hear their viewpoints I still continue to research for I need tax authority to back my final decision on whatever tax position I take. If you are a professional then you know what I mean. If you are not, then please, seek the advice of one right away. Ask for a professional who specializes in SCorps.

Hope this helps,

Diane Offutt

I think we do allow them to hunt seal, and catch salmon without a license. However, due to global warming, there are none of the foregoing left to hunt or catch.

I also apologize for this digression, and this mini-snapshot of American cultural goings on, such as they are. There was a part of my heart that was left at Wounded Knee as well.