C-Corp officer bonus

[mike161c]

I'm an officer & shareholder in a small-business C-Corp. I do not have sufficient business income to take a regular salary. I would like to pay myself an occasional bonus when business income allows it.

Here are all the options I'm aware of for compensation:
- pay myself a salary, reported on form 1120 line 13 "salaries and wages"
- pay myself officer compensation, reported on form 1120 line 12 "compensation for officers"
- distribute myself a dividend.

I familiar with dividend distributions, and how to report them (1099-DIV, goes on your form 1040). It's easy for reporting but it's double taxed, and it doesn't include any FICA taxes so won't help me build up my Social Security.

So I'm seeking more information on salary and officer compensation and feasability for this once/year bonus.

First what's the difference between salary (line13) and officer compensation (line12)?

Either way, salaried bonus, or officer compensation, I'm certain this is income subject to FICA taxes and withholding and I'm not familiar with how to report such an infrequent event, this not being a monthly thing. The C-Corp so far has no employee and hasn't had to withhold and deposit any employment taxes.

The IRS says about FICA and income tax withheld "There are two deposit schedules, monthly and semi-weekly. If you fail to make a timely deposit, you may be subject to a failure-to-deposit penalty".

A once a year bonus does not fit that monthly/semi-weekly schedule. How do I do this?

[Anonymous]

please clarify. how can you have money to make a dividend distribution but you don't have money to pay a salary?  since you are an officer/shareholder any salary and or bonus paid to you goes on line 13.  you should consult a tax pro who can go over your numbers and give you proper advice.  we can see nothing.  The IRS says reasonable comp for services performed but based on court cases and other rulings and findings that really does not come down to any formula such as % of profits before compensation and even whether a salary has to be taken in years the Corp is unprofitable. perhaps liquidating the C corp and forming a single-member LLC would be better for you.  

[mike161c]

I cannot change to a "single-member LLC" because:

- this is already an LLC.
- it is not single-member
Regardless, that doesn't really matter here because an LLC is not an taxation option, it is a state-law concept for liability protection. An LLC can be taxed as an S-Corporation, this one has previously elected to be taxed as a C-Corporation.

You mention "reasonable compensation". That topic may be out-of-scope with the question, that "reasonably" is typically more of an issue for S-Corporations, where shareholders are tempted to not compensate themselves enough to save on employment taxes. The reverse is true with C-Corp where compensating yourself with a huge salary reduces your business taxable income, which the IRS may not like, but I'm not trying to give myself an unreasonable bonus here. And, I actually am trying to pay some FICA and income taxes instead of taking money out as a dividend.

I said "I would like to pay myself an occasional bonus when business income allows it" and "income is irregular", therefore I do not understand what needs "clarification". When there is business income, the business could issue a dividend, or I could take another form of compensation.

That question is about how not to take a dividend. I'd like that bonus to be subject to FICA taxes, but I don't want to have to setup a monthly salary.

[Rick19744 · Accepted solution]

Some comments on your questions and response:

1. Any shareholder / officer wages should be reported on line 12, which is pulled from Form 1125-E.  The difference is the IRS wants to see detail of officer wages.  Line 13 is just wages of all other employees.
2. The IRS does indeed care about reasonable salary for C corporations.  Specifically, IRC Section 162(a)(1) states a corporation is allowed a deduction for compensation only if the amount paid is reasonable for services actually rendered.  While there is more of a battle in smaller S corporations, the battle with C corporations comes as the C corporations get larger.
3. Technically, paying out a bonus towards the end of the year is okay since you indicate that your income is sporadic.  This income is deemed to have occurred throughout the year.  Many corporations pay out bonuses which are in fact just tax payments to federal and state and these tax payments are deemed to have been remitted prorata through-out the year.
4. Paying out dividends in a C corporation is more complicated than just completing a Form 1099-DIV.  Dividends are paid out of earnings and profits (E&P) which is not the same as retained earnings on the balance sheet.  So in order to pay out dividends, you must first compute your E&P and then update the E&P when paying out any dividends.  If you pay out more in dividends than E&P, you will also be required to complete Form 5452.
5. The deposit rules tie into your withholding amounts.  So if you have not withheld any taxes, there is no deposit requirement.  Payroll taxes can be a bit tricky and expensive (payroll tax penalties).  It may be in your best interest to involve a payroll service.  The benefits will clearly exceed any cost in an area such as this; especially if you do not have regular payroll, but still will have payroll filing responsibilities.

[mike161c]

Thank you for your response. 

Indeed this is not professional tax advice, this is strangers communicating on an online forum meant for people to discuss taxation subjects.

I think your answer is recommendating payroll services. I've been staying away from those in this case because:

- there's currently nobody on payroll, no salaries, no withholding, no employment taxes. We're not trying to grow the business, so there is no hiring in our future.

- setting up a payroll service, for 1 person on payroll, afaik would cost at least $20/mth. 

- It's not certain that this bonus would be made every year, why pay fees every month, for years, for no compensation paid 99% of the time, for an occasional one-time bonus. Paying for professional payroll makes total sense when you pay a monthly salary.

- I'm hoping the ability to pay myself a one time bonus can be done DIY. Immediately upon having decided the amount of that bonus, making 1 EFTPS payment to the IRS for the income tax withheld and the associated FICA and FUCA taxes. And at end of tax year, update line 12 of Form 1120 with the amount of that bonus, and attach any forms related to FUCA/FICA deposited during the year.

[passingmagic]

Looks like you figured it out for yourself. Replying because I have had similar questions to yours, and similar thoughts around the costs of setting up and having a payroll service vs. the complexity of dealing with the payroll tax deposit system. I too had to decide between salary and dividend.

What I ended up from a thinking perspective was, that it was best to take the money out partly as dividend and partly as salary. This is the best tax outcome, and gives you the benefits of income splitting. Since I too had uneven income, I decided that I would pay the corp taxes on it, and keep the money as retained balance until it had collected enough to the point that I could pay myself a salary for a few months, and also some dividend to get the income splitting benefit. Once I know I have 6 months of salary collected, then I sign up for Gusto/other inexpensive payroll processing service, and give myself a salary for the 6 months or so. After that you can stop/suspend the service. I did consider the DIY route of payroll payments, but after much research decided that I didn't want to mess with that. Too risky, too complicated.

I also have a fiscal year that is offset from the calendar year, so it lets me plan out how much I should take as dividend and salary based on what my personal tax situation is looking like for the year.

So the gist of my suggestion is: don't take small payments, just leave the money in the corp and take it later on when you have enough for a few months' worth of salary. If you want to take some to optimize your personal taxes (e.g. you have a low year in terms of personal income, and would like to take some of that money from the corp that year) you can do it as a dividend, which will have the same impact on personal taxes as income, because it is considered ordinary dividends.

Hope this has helped. DM me if you want to discuss more.

[Rick19744 · Accepted solution]

And in response to @passingmagic comments, anyone thinking of doing this had better have a one on one with a tax professional.

Dividends paid out of a C corporation MUST come out of a corporations earnings and profits.  This is NOT the same as taxable income.

There is a separate calculation that is required to be made to support any 1099 -DIV amounts being paid out.  This is a cumulative calculation and must be updated annually.

[Mike9241]

when you do pay yourself a salary/bonus in addition to depositing the taxes, you will have to file form 941, annual forms 940, w-2 w-3. your state probably also has a UC tax that requires you to register with their UC bureau and file and pay UC taxes.

per the iRS

After you file your first Form 941, you must file a return for each quarter, even if you have no taxes to report, unless you filed a final return or one of the exceptions listed next applies.

Exceptions

Special rules apply to some employers.
• If you received notification to file Form 944, you must file Form 944 annually; don't file Form 941 quarterly.
• Seasonal employers don't have to file a Form 941 for quarters in which they have no tax liability because they have paid no wages. To tell the IRS that you won't file a return for one or more quarters during the year, check the box on line 18a every quarter you file Form 941. See section 12 of Pub. 15 for more information.
• Employers of farm employees don't file Form 941 for wages paid for agricultural labor. See Form 943 and Pub. 51 for more information.

If none of the these exceptions apply and you haven't filed a final return, you must file Form 941 each
quarter even if you didn't pay wages during the quarter. Use IRS e-file, if possible.

[passingmagic]

@Rick19744 what are you suggesting with your first sentence exactly where you quote me?

If you read my post carefully you will see this: "I decided that I would pay the corp taxes on it, and keep the money as retained balance until it had collected enough to the point that I could pay myself a salary for a few months, and also some dividend to get the income splitting benefit.". Clearly states that the corp taxes are paid and then dividends are issued.

Obviously dividends are paid out of earnings and profits. No, I don't need to pay a "tax professional" for a one on one to know that. It's quite basic. If you think there are other aspects in what I suggest that need a one on one with a tax professional, please be specific in helping the community out, rather than put out a FUD sentence like that.

[Rick19744]

@passingmagic glad you understand what you are doing and don't need any tax professional to provide any assistance.

May the IRS audit algorithm be forever in your favor.

[passingmagic]

More FUD, is all you are providing.

[Mike9241]

More FUD

Year 1

a) you put $10K in to start a C-Corp

b) it buys $5K of equipment

c) it has a profit of $5K before depreciation

d) it takes a section 179 deduction of $5K on the equipment. This results in no taxable income

e) near year-end you withdraw $2K of your capital contribution. is this a taxable or tax-free dividend/distribution

Under IRC Sec 312 the Corp has earnings and profits of $4K. subsection (k)(3)(B) only allows a $1K section 179 deduction for purpose of computing E & P.  The IRS would argue this makes that $2K a taxable dividend.

there are many other adjustments required under that tax laws to convert taxable income and retained earnings into E & P.  Maybe your C-Corp is one of the lucky ones that requires no adjustments.