Discussion:S-Corp salary/draw or payroll

The owner must be on p/r with all the required p/r taxes w/h and paid.

If the Accum Earning acct shows a profit, then the shareholder can take a non taxable distribution.

W/o p/r the irs can say you evaded taxes and that is illegal.

Blrgcpa: the tax assessment on distributions from an s-corp is based on the shareholders basis in the shares, not Accum Earnings. By definition as a pass-through entity an s-corp cannot accumulate earnings. Perhaps you were refering to the accumulated adjustments account?

William Price, EA | Portland, OR - Talk to me

Will

EDIT: After browsing the 1300's in vain for something to hang my hat on in regards to the accumulated earnings issue, I think I figured out were my confusion lies, and that is in the difference between the terms Accumulated Earnings and Undistributed Earnings. I have viewed them as interchangeable and that is perhaps in error. I learned early on that an S-corp could not pay dividends because it did not have undistributed earnings. I broadened that concept to encompass accumulated earnings as well. Thanks for the feedback Jdugan.

Will

Can an owner do this and avoid paying taxes on income by reducing paid in capital that was contributed to start the business, or does this still need to be reported as income on her 1040 Schedule C?

I know this is probably a basic question for most of you, but it is the first time I have ever run across it. Thanks.

Are you preparing the tax return for this client? If so, I would recommend that you get some close supervision as this really is a very basic question. If she has elected to be a "disregarded entity" her business income and expenses will be reported on a Schedule C. There is NO PAYROLL to a sole proprietor. ALL the net income will flow to her personal return regardless of whether or not she pays herself draws or return of capital or whatever you want to call it. Draws, distributions, etc. are NOT deductions against the income.

Thanks for the advice. You have really helped not a bit, except to try to make me feel like a moron. I don't need supervision, I just need to figure out what to do with the draws that she took against paid in capital. Knowing what the issues are is more than half the battle.

I could continue on about your crappy attitude wherein you merely provide me with advice to seek supervision and hardly explain anything tax related, but I think the time will be better spent posting this question as a new thread. You want to talk about supervision, her last set of returns for 4 or 5 years were prepared by a firm of CPA's while she was working for a salon and getting a 1099. Of course, the CPA firm also did the salon's returns and they had the salon giving its stylists a 1099 even though they weren't independant contractors. The CPA firm was preparing her tax return based upon a summary of her personal credit card transactions that the credit card company provided at the end of the year. They were deducting meals and entertainment expense even though she never took any clients out for dinner, they were deducting gifts even though she never gave any, and they were deducting mileage even though she drove to the same shop every day for work. Maybe I should go over there and supervise them. Yes, I also know that these things can be reported to the IRS, but my client didn't want to go through the hassle, she still has friends working at the salon, and she likes the owners too. Okay, I told my self I wasn't going to get irritated by your post, but obviously I am.

The suggestion that you start a new thread was a valid one. Your subject is not corporate. But to answer... Your client will file a Schedule C. No wages are paid to a self-employed individual so those wages are not a deductible item in arriving at Net Income. Your client will pay tax (income and SE) on that net. Capital is not related to a Sole Proprietorship. Finally, it is very common in the hair salon business for the stylists to work as independent contractors. They frequently rent space from the salon, share some commmon expenses, and keep their income or share a % of it with the owner.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 17:47, 25 January 2007 (CST)

As for prior years, many hair dressers "rent" the chair from the salon and are in fact self-employed.

As for Will's comments: The AAA is basically a sub acct of R/E. It shows the accum earnings of the s corp. In order to make a distribution of any kind, this acct must have a credit balance. Then the distrib is make according to the shares o/s.

Another point: by lowering his salary to such levels, he cannot take advantage of the maximum contributions under pension plans. Depending on his age, I suspect an actuary could whip up a very large defined benefit contribution for him, whether using salary or Sch C earnings.

Another way to look at it is what a third party would pay the stockholder to perform the same services as an employee, or what the stockholder would pay someone else to do it.

In the current question of Mr. Hastings, I took it that a "professional" was more than likely providing services, though Katie's point could well apply to those in medicine with expensive equipment.