I own 100% of my S-Corp. I would just transfer the minimal amount of profit I made throughout the year to myself. Can I report this as an owner's draw, and if so, how?

[joshleviton]

So I essentially profited $10,000 from my S-Corp. I am the sole owner/shareholder. Throughout the year I would just transfer any earnings I had from my business account to my personal account.  I am confused on the best way to report my income. I was told an owner's draw is how I should do this but I can't figure out how.  

I do not want to report this as a salary because I would have to pay payroll taxes, though I have read that I pretty much guarantee getting audited if I list it all as distributions.  I was going to list the 10,000 as distributions and then when the K-1 is generated report that number on my personal taxes in the corresponding section. I

Am I allowed to report the income as self employment income? Or is there a specific way to report it as an owner's draw.  I want to avoid paying payroll taxes, is this possible?

[Coleen3 · Accepted solution]

No, you can't avoid payroll taxes.

Self-employment taxes

Whether you're self-employed or an employee, you'll have to pay Social Security and Medicare taxes to the government. When you work for someone else, you're only responsible for part of these taxes, while your employer pays the balance. However, if you're self-employed, you have to pay both portions of this tax. The combined employee and employer portions of this tax amount normally amounts to 15.3 percent, although the rate was dropped to 13.3 percent for tax years 2011 and 2012.

S-Corp distributions

If you organize your business as an S-corporation, you can classify some of your income as salary and some as a distribution. You'll still be liable for self-employment taxes on the salary portion of your income, but you'll just pay ordinary income tax on the distribution portion. Depending on how you divide your income, you could save a substantial amount of self-employment taxes just by converting to an S-corporation.

Risks of S-Corporations

The IRS tends to take a closer look at S-corporation returns since the potential for abuse is so large. For example, if you make $500,000 in one year but only designate $20,000 of that as salary income, you might trigger an IRS inquiry, since you are avoiding so much self-employment tax. The guiding principle is that you must designate a "reasonable" amount of your income as wages, rather than a distribution. What constitutes "reasonable" can often be a gray area, but if you push the envelope too far, you put yourself at risk for an IRS audit and potentially penalties and interest on any back taxes assessed by the IRS.

https://turbotax.intuit.com/tax-tips/small-business-taxes/how-an-s-corp-can-reduce-your-self-employm...

[joshleviton]

Excellent! Thank you for the info!

[Coleen3]

My pleasure.