Discussion:How to pay distribution in S-Corp

Here's a hypothetical. If my S-Corp has net profits of 130k and I take a "reasonable salary" of 65k for my profession, I know that I would only pay SE tax on the 65k salary vice the first $94,200 for 2006 as an LLC. If I then wanted to pay myself the remaining 65k at the end of the year as a "distribution" is this amount tax free????

Thanks!

Thank you.

or shoud we just direct her to the dozens of threads on compensation/payroll/salary?

All the free help you need will be there.

I have not been able to find the answer to my question, that's why I posted my question.

Thanks, Phil

The IRS can have a party with that.

You could issue the W2 late, but follow the rest of the rules. Or you could issue a 1099 (also late) and break the S Corp salary rules, but at least pay SE tax. Or you could do what your old accountant did and just run all profits through Schedule SE without a 1099 and break even more rules, but still at least pay SE tax. So it's all relative whether it's too late to issue a W2. I agree to find a professional who knows what they're doing, but I also think that's easier said than done (you already had one that you thought knew what he was doing, right?). Try finding one through a referral, or maybe someone on this site is near you.

However I usually try to make the distributions quarterly, bi-annually or annually. This way they at least resemble something like dividends or distributions and not payroll.

Imagine how old that would get.

I am completely paranoid about this and constantly hound my clients to get on quarterly payroll. I hope I'm not wasting my clients' time and money.

I imagine that agents are evaluated based on adjustment dollars per audit. Are adjustments to payroll taxes (in the case of a reasonable wage audit) given the same value as adjustments to federal income taxes? I would think so, but I don't hear about many reasonable comp audits, and based on this site there are many who don't follow the rules.

I have a client that was set-up as an S-Corp a little too soon but what is done is done. He is not making hardly enough to stay a float, he is taking a small salary; does he have to take a salary in his situation? --TLCTaxGirlAZ 19:36, 25 June 2007 (CDT)

Its gonna be interesting from a 1040 perspective, dealing with the inflow of taxable income from the S corp at the end of the year. With the C corp I could always leave money in the C corp, pay the 15% tax and not drive my personal tax rate off the cliff. Doesn't sound like I'll have too much control with the S corp.

I hope you have good professional advice in this process. It's not a do-it-yourself project. There are more pitfalls and complexities than we can explain to you in this forum, all depending very much on your own facts and circumstances. The help of a qualified adviser will be more than worth what it costs.

The C corp dividends are still available to pay dividends. Reread KatieJ's post.

S corporations with C corp E&P are subject to some special, fairly complicated rules. They have to keep track of their income that is distributable tax-free to their stockholders with an accumulated adjustments account (AAA), and the rules for that are somewhat complex. They are also subject to involuntary termination of the S election if they have too much passive income. You should be talking with a qualified tax adviser who can explain all of these matters to you with access to all of the relevant information about your business. Don't try to do this yourself.

Secondly, you state you took out and paid fed & state taxes on the "dividends." How did you do this? Those taxes would normally not be paid like P/R withholding but would be paid as estimated tax deposits. They should have been reflected as tax payments on your individual return. If they were paid by the corp, they should have been treated as additional dividends.

Sorry you got dinged for $9k by your present/former accountant. You don't say what form your records are kept in. My guess is that they were not in very good shape. I hate to say you should see someone else but, maybe you should see someone else.

1. Don't rely on QB as a good source of accounting data for your accountant, unless a qualified bookkeeper is doing the data entry. This board is given to us by Intuit, but contrary to QB advertising one cannot necessarily do accounting correctly simply because they use QB. Some accountants I know want their smaller clients to use Quicken (another Intuit product, by the way) simply because Quicken cannot be messed up by inexpert bookkeeping as badly as QB can.

2. Make sure you find an accountant who will work with you during the year, not just at tax preparation time. Find somebody who will take the time to explain S corp tax issues. Based on your message, you are not clear on that subject.

3. Make sure you listen to the professional advice you are given. This year I lost a client who was outraged because he owed $20K on his 1040, which included a flow-through from an S corp. He was counting on a refund, even though he refused to make tax payments I had been telling him to make since early 2006. Almost every professional on this board probably has had a situation like that; be careful not to be that kind of client.

Also, contact the IRS to find out what exactly you have paid on your 941s and withholding (your SSN). Most likely you would be able to have the taxes "withheld" on your dividends treated as estimated payments. It does sound like your 941s are messed up for 2006. One quick check you can do is to add up the taxable wages on the first page of your 941s and compare this number to your W-3. The IRS will do this eventually anyway.

I just started my business and for the first month or so I have taken only distributions. And covered business related deductions. I now take a reasonable salary, and the money that is paid to my S corp comes from an LLC I’m just going to give you real amounts because it’s eaisier… monies deposited to my PC from the LLC total $18533.50 over 4 pay periods Each time money was deposited to my PC from the LLC, before paying myself a distribution or paying for deductions, I deposited 30% of that amount to a savings account for yr end taxes

                Thus I've deposited a total of $5560.05 or 30% of $18533.50

I've drawn distributions from the $18533.50 only 3 times...when needed, for a total of $9056.09

         30% of $9056.09 is $2716.83

Am I correct in thinking that I have over saved $2843.22 for income taxes ($5560.05<what has been deposited> minus $2716.83<what I think should have been deposited>)

So, should I only be saving 30% of the distributions paid to my personal account, and not 30% of the full amount coming into my PC from the LLC? Say I only take $2000 of that $6000 each month the rest goes toward business deductions, the SEP IRA we spoke about, or just sits. If this is the case, should I only be saving 30% of that $2000 or $600 ?

In my example: My PC gets 11,000 per month from the LLC. $5000 is paid as a salary starting OCT 1st. I was told to give to myself... $3767.50 of that salary and save the rest for monthly taxes. Thus $6000 is left over.

Say my wife gets a great job when she returns from her Yoga training and we don't need any of that left over $6000 to cover our fixed personal living expenses. We decide that we can live on my 3767.50 per month and whatever else she brings in. But in December we decided to draw $2000 to help cover the Holiday expenses. I would pay to my personal account $2000 and then save 30% of that $2000 or $600 for taxes. Can the remainder of the money each month (ie the $6000 minus any business deductions) sit in a holding account until I need it or until the end of the tax year? And then, when I need it, or at the end of the year I can take out my 30% tax on whatever I draw?

That being the case, it seems to make more sense to loan all start up captital to the corp instead of having shareholder equity. That way the loan payments are an expense deduction and I only have to pay tax on the interest and the principal really would be returned to me tax free.

Basically, our net profit from 2003 through 2008 is $992.65. That is not the same amount as our starting bank balance for 2009 though, which is $8,727.87. The $7,734.92 differential is additional cash on hand that predated our incorporation. Since we have no obligations in the form of debt, loans, or other partners/investors, it’s considered to be money that we put into the business up front as a cash reserve (and there is no other record on this earth as to where it came from). There really wasn’t any other way to slice it, since the statute of limitations on any potential income we realized prior to 2003 has long passed. We also didn’t need to file any tax returns before 2003 when we incorporated and started to incur significant expenses.

This means that we will show that we still have a balance of $2,534.92 invested in the business. We can take a tax free repayment on it in the future.

Does this sound correct to you? Also, would assuming that we each invested the same about upfront be grounds claiming a different dividend distribution than 40-20-20-20?

Thanks.

1. I don't know how you got to $2,534.92 - you didn't mention any distributions at all. 2. Income is allocated to S corp owners each year, and the allocation must be in proportion to their relative stock ownership percentages. If I picked up this account, I would probably treat the $7,734.92 as paid-in capital and allocate it evenly, but then it wouldn't be available for tax-free distribution. 3. I don't know what "money raised from donations" means. From whom? Why are you entitled to treat that as your money? 4. An S corp owner is free to take any distribution he wants as long as there's money in his undistributed earnings account. One owner taking a distribution doesn't require the others to take one.

BTW, I am a fan of DC United, and will be until AC Philadelphia takes the field in 2010.

That's not true. S Corp distributions, as a whole, must allocated to shareholders based on ownership percentages. If the S Corp distribution is 10K, then each shareholder must receive their allocated percentage. If you don't, you create a second class of stock and that will blow the S Corp election.

I see I left out a critical number... there was a $5200 disbursement in 08 that's being treated as a repayment of invested cash by our accountant who tells us that because it's a "repayment" we don't have to claim it. "Money raised from donations" is just that. It's a website that was initially funded by donations, but has now turned into a self-sustaining business. I don't know why we're entitled to treat it as our money, that doesn't make sense to me.

But you're absolutely right and he's dead wrong. I'm kind of in shock right now.

If you were in my position, would you do anything? I still have somewhat of a personal friendship with my old boss, but I don't think I'm in a position to tell him the basics of S corp (he's 60 and I'm 30). Thoughts?

The salary should be a reasonable amount to someone in your profession.

Say you own a pet store, you manage it, and your profit that year is 1MM.

Should you take a 600k salary? An 800k salary?

If it benefits you, you take a 100k salary -- because your assistant managers all make 50k, and your last job when you worked at a corporate pet store you made 70k as a manager. If the IRS says "well you perform the duties of a CEO of the pet chain who is making 500k", you reply: "I work in the stores. I don't manage a CMO, CTO, CIO, marketing initiatives, press, nor am i responsible for thousands of employees."

Reasonable salary means you treat the company like a company -- it's sole obligation is to maximize profits for shareholders, which includes paying the smallest salary possible in order to keep employees happy.

NYC doesn't recognize an S-Corp , so it may be considerably cheaper in certain situations to pay a higher salary

There are some potential pitfalls, though. For example, distributions, unlike salaries, must be proportional to stock ownership; that is, if you and your wife receive a distribution of $10, your BIL and your SIL's trust must each receive $5. Otherwise the corporation's Subchapter S election could be invalid. In addition, if you receive distributions in excess of your basis in the corporation, that excess amount will be taxable income to you.

S corporations are not do-it-yourself projects. The rules are complicated and it is easy to make expensive mistakes. Get yourself to a competent tax professional as soon as possible. Only a professional who has access to all of the facts and circumstances of your particular situation can advise you properly.