Single member llc and elected s corp. Is payroll with w2 required or can I transfer money, pay quarterly est taxes and when I file return indicate salary vs distribution.

[bwa · Accepted solution]

Can you explain how withdrawing money and paying fed, med, soc and state is not the same?

Making quarterly estimated tax payments is not "paying fed, med, soc and state".  They're merely an advance deposit on your liability, whatever that may be.

The way to pay "med, soc and state" is to file and pay quarterly employment tax returns with the IRS (Forms 941) and state, issue a W-2 at the end of the year, and report it as wages.  If you haven't filed Forms 941 you haven't paid Social Security and Medicare, or paid over withholding withheld from wages.

[TaxGuyBill]

To add on to this answer:

Section 3121 of the Tax Code defines an officer of a corporation as an "employee", and that the pay for an employee is called "wages".
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/3121">https://www.law.cornell.edu/uscode/text/26/3121</a>

That subtitle of the Tax Code is called the "Federal Insurance Contributions Act" (FICA) that requires Social Security and  Medicare to be withheld from the employee's pay, and the EMPLOYER must remit that amount, as well as the employer's share, to the IRS.  The means to do that is by the quarterly Form 941.  Sections 3401 and 3402 has a similar requirement for Federal Income Taxes to be withheld.  A similar provision requires Federal Unemployment to be paid by means of Form 940.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/31.6011(a)-1">https://www.law.cornell.edu/cfr/text/26/31.601...>

Because of that, a W-2 must also be filed.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/31.6051-2">https://www.law.cornell.edu/cfr/text/26/31.6051-2...>

[SweetieJean]

Please see this:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

[davegardiner3]

I have read this, it states nothing about a paycheck, at year end i can classify what amount is salary vs distribution, yes or no?  Please show me where it says i must pay myself a check not just transfer money from act to act.

[SweetieJean]

"Distributions and other payments by an S corporation to a corporate officer must be treated as WAGES to the extent the amounts are reasonable compensation for services rendered to the corporation."

[SweetieJean]

<a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers">https://www.irs.gov/uac/wage-c...>

[SweetieJean]

Officers of S corporations are required to receive regular payroll checks
<a rel="nofollow" target="_blank" href="http://smallbusiness.chron.com/can-owner-employee-pay-himself-payroll-12239.html">http://smallbusine...>

[davegardiner3]

Thank you but WAGES doesn't mean paycheck, so i transferred money from bus act to pers act and i paid quarterly tax estimates so i should be fine.  On the return indicate the diff of WAGES vs DISTRIBUTIONS.  So I am still looking to see where it says i HAVE TO RUN payroll with paychecks.

[davegardiner3]

I appreciate the second link, first time i have seen someone say you must cut a paycheck, but I'm not sure this is a trustworthy source rather than an opinion of what was read on the IRS site that does not says paycheck.
My "payroll" is a transfer.  I took my 2015 #s and am paying 110% split into quarters.  If I make anything extra that is distribution not subject to the same.

[davegardiner3]

To clarify my 2015 # and 110% refer to tax liability, so I am definitely covered in "reasonable salary" it just does not come in the form of what W2 employees know as a "paycheck".

[alaina-payne]

@davegardiner3 did you ever get your answer for this?  I'm wondering the same.  First year filing as an LLC electing S Corp and I'm afraid I need to issue myself a W2.

[davegardiner3]

You DO NOT need to issue yourself a W2. I would use a CPA to learn all the different things you can do the first time then you are good to go. When you issue yourself a W2 you take away the purpose of electing SCorp and tax savings benefits it offers you

[TaxGuyBill]

"You DO NOT need to issue yourself a W2."

In most cases, that is false (as everybody else here says).  You are legally an employee of the corporation. As such, if you take money from the corporation for personal purposes, that means your "compensation" needs to be on a W-2.


"I would use a CPA to learn all the different things you can do the first time"

I completely agree.  There are way too many do-it-yourselfers that do things wrong, and end up paying WAY too much in taxes and/or penalties.


"When you issue yourself a W2 you take away the purpose of electing SCorp and tax savings benefits it offers you"

Wow, that is totally wrong.

[Critter]

Payroll of some kind must be taken and the appropriate payroll tax forms filed timely.  You cannot file it all at the end of the year with the tax return.

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made. The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes. From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

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.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes. Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions . The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.)

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.