S corp owner pay

[lazizbekn]

In 2021 I registered my company as an LLC. Last year I filed the form 2553 to be treated as an S-corp in 2022. I didn't know that I had to pay myself through payroll and pay quarterly taxes. Even though my company had losses in 2022 I was able to pay myself, because I had income in 2021 when I was LLC and paid taxes, so the money I paid myself was tax free. Any advice for my situation? Thanks

[DavidD66]

If your S-Corp didn't make a profit in 2022, you would not have needed to pay yourself a salary.  If you did pay yourself as an employee, you would have to issue your self a W-2, so the amount you paid yourself would be taxable.  It would also increase the loss for your company, which would reduce your taxable income.  If that is what you did, you paid yourself with earnings that were taxed in 2021.  Instead of paying yourself a salary in 2022, you could have just taken a distribution of the retained earnings from 2021, which is not a taxable event since you already paid the tax on those funds on your 2021 tax return.

[lazizbekn]

Thank you DavidD66 for your reply.

I did not pay myself as an employee, I just used to transfer some money from my business account to my personal account from time to time, as I did when I was LLC. I already filed my 1120s where I classified my earnings as salary (I found out about the form 941 requirements after I filed my return). If I were to amend it, do I classify them as distributions? Thanks.

[Opus 17]

In general, the owner of an S corporation must pay themself a fair market salary for the work they do.  That salary is reported on form 941 and the company must issue a W-2.  (In fact, it is permissible to pay one lump sum, such as on December 30, but a fair market salary must be paid.)  The company pays 7.65% social security and medicare, and possible FUTA, and the employee pays 7.65% social security and medicare.

If there is profit after paying a fair salary, that profit can be paid out and taxed as income without paying employment taxes.  But if you take no salary and try to take all the profit without paying self-employment tax or employment taxes, well, that's one of the biggest audit red flags the IRS has.

I don't know about paying a salary if the company loses money.  @rjs  or @Hal_Al ?

"because I had income in 2021 when I was LLC and paid taxes, so the money I paid myself was tax free."

This is a very odd statement, and I don't think you actually mean what you say.  When you are a disregarded entity (like an SM LLC) you are the company and the company is you, you are the same.  You pay SE tax on the net profit from the business.  I think you are confusing what you might actually "cash out" of the business for your financial needs and your taxable income.  

[AliciaP1]

No, as Opus 17 states, you must pay yourself a reasonable compensation and withhold appropriate payroll taxes if you perform services in your S-Corp that generate income.  The amount reported as payroll must be at least 50% of the total amount you take out of the business (so distribution amounts cannot exceed reported gross salary or wages paid to you).

Per the IRS:

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The best thing for you to do may be to amend your 1120S to show the correct amount of payroll based on your reasonable compensation determination and report the payroll and applicable taxes on Forms 941 and 940 even though the payroll returns will be filed late.

You may want to find a payroll/tax professional in your area to help you with this.

@lazizbekn

[lazizbekn]

Thank you Opus 17, AliciaP1 for your replies.

I consulted with two CPAs today, one said I have to set up payroll for the past year even if you had a loss , other said that I don't have to when I had a loss. Can the second one be right?

[Opus 17]

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@lazizbekn wrote:

Thank you Opus 17, AliciaP1 for your replies.

I consulted with two CPAs today, one said I have to set up payroll for the past year even if you had a loss , other said that I don't have to when I had a loss. Can the second one be right?

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I don't know, I already paged a couple of experts more knowledgable than me, I'll try two more

@Critter-3 

 @Anonymous_ 

[Anonymous_]

The IRS, to the best of my knowledge, is not at all concerned with a salary on an absolute basis.

As a result, if the corporation is showing a net loss, the reasonable salary requirement becomes a non-issue. For example, if the figure in Box 1 of K-1 (1120-S) is -$100,000 and no salary had been paid, the IRS will not intervene because there is nothing to recharacterize (with these salary issues, the IRS handles the issue by recharacterizing some of the net profit passed through as ordinary income as salary that should have been paid).

On the other hand, if the corporation is profitable and is showing ordinary business income of $100,000, for example, in Box 1 of K-1 (1120-S) but no salary had been paid to shareholders who performed services, that is, indeed, problematic and the IRS may recharacterize part (or all) of the $100,000 as salary.

Obviously, the difference in either case is whether payroll taxes have been paid or should have been paid.