Turbo tax asks me to enter an amount for cash I took from the business and later asks me if I paid shareholders owning more than 2%. Is this a redundancy if I am the only shareholder? What is the difference between taking an owners draw and paying shareholders?
Paying yourself wages as an employee of the S corporation results in Federal income tax, Medicare and Social Security being withheld from your pay and remitted at least quarterly to the Treasury. It also means the employer S corporation pays matching amounts of Medicare and Social Security as a business expense to the Treasury. It also may mean other applicable taxes such as unemployment benefit taxes, SUI, FUI and who knows how many other Federal and state taxes there are on employee wages.
On the other hand, a distribution of income of the S corporation to a shareholder is a tax-free payment. Since the shareholder picks up his/her share of the income of the corporation whether it is distributed or not, a distribution itself is not a taxable event. And no payroll taxes are withheld. And the distribution is not subject to the Self-Employment Tax.
Now, don't get the idea that you can forego any wages in favor of all distributions. The IRS figured that out also and volumes of material have been written on how they might re-characterize a distribution as wages to collect the payroll taxes. Your best bet is to make a stab and the division yourself so you show that you recognize that a wage payment to a controlling shareholder is part of the game. As long as you're reasonable in the split (and don't get me started on what reasonable means) the IRS will most likely leave you alone. But if you say everything is a distribution and there are no wages, be prepared to fight a losing battle if and when they come knocking.
Incidentally, after year end, you cannot go back and re-characterize a distribution as wages since you did not report those wages on a quarterly payroll return nor did you give yourself a W-2. So you may be "up the creek" for 2015 but forewarned for 2016.
If I pay myself a salary where do I generate the W-2?
Paying yourself wages as an employee of the S corporation results in Federal income tax, Medicare and Social Security being withheld from your pay and remitted at least quarterly to the Treasury. It also means the employer S corporation pays matching amounts of Medicare and Social Security as a business expense to the Treasury. It also may mean other applicable taxes such as unemployment benefit taxes, SUI, FUI and who knows how many other Federal and state taxes there are on employee wages.
On the other hand, a distribution of income of the S corporation to a shareholder is a tax-free payment. Since the shareholder picks up his/her share of the income of the corporation whether it is distributed or not, a distribution itself is not a taxable event. And no payroll taxes are withheld. And the distribution is not subject to the Self-Employment Tax.
Now, don't get the idea that you can forego any wages in favor of all distributions. The IRS figured that out also and volumes of material have been written on how they might re-characterize a distribution as wages to collect the payroll taxes. Your best bet is to make a stab and the division yourself so you show that you recognize that a wage payment to a controlling shareholder is part of the game. As long as you're reasonable in the split (and don't get me started on what reasonable means) the IRS will most likely leave you alone. But if you say everything is a distribution and there are no wages, be prepared to fight a losing battle if and when they come knocking.
Incidentally, after year end, you cannot go back and re-characterize a distribution as wages since you did not report those wages on a quarterly payroll return nor did you give yourself a W-2. So you may be "up the creek" for 2015 but forewarned for 2016.
If the S-Corp owner just runs payroll and pays taxes, but doesn't actually take the salary amount from the the Corporation,
#1) What is the P&L impact? If they take the money, it will be salary expense hence cut taxes.
If they don't take the money out (I think they are hurting themselves) by inflating profits artificially and paying more taxes later.
What is the Balance Sheet Impact?
Is it a) sits in salaries payable b) move to owner's contribution c) If they are also taking draws, will you net against it.
thanks
If you do not move the funds out of the corporate account then it has no effect on the P&L ... on the books it will be an expense of wages and a balancing entry as a loan from shareholder. With an S-corp the earnings are taxed in the year earned and not the year the profits are distributed. I highly recommend you seek professional assistance in getting your books set up correctly and/or getting educated in the way of keeping the books.
Just as a point of clarification, distributions are not taxable to the extent that a shareholder has basis in the S corp stock.
In addition, there is the possibility that a distribution can be taxable if it exceeds the AAA (accumulated adjustments account) and there is E&P (earnings and profits). This occurs if the S corp acquired a previous C corp that had earnings and profits or the S corp was a previous C corp and converted to S corp and also had E&P.
If the later is a possibility, you need to get some professional tax advice to understand how this works.
Your statement "...a distribution of income of the S corporation to a shareholder is a tax-free payment." Is incorrect. It is subject to Federal Income Tax.
Okay, I have the same situation. Have an S-Corporation, am it's sole 100% shareholder and pay myself from it as a 1099 contractor.
If I use your plan of some "wages" (as 1099-Misc) and some "dividends" (1099-DIV), say a 50/50 split, what kind of dividends are those designated as?: Ordinary, Qualified, Capital Gains distribs., Non-dividend distribs., Cash Liquidation, etc., what? (Choices on 1099-DIV form below:)
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I'm a one-man shop, with an occasional contractor (other than me) that I pay with 1099 accounting.
What do each mean?
Which one should I use?
I just want to collect all the income that I received through the corporation each year.
As the owner of an S-corp you CANNOT 1099 yourself ... you MUST pay yourself wages and file all the proper payroll tax returns like the W-2, W-3 & 941/940/944.
Seek assistance from a payroll company if you do not understand how to do this ... ADP & Paychex are nationwide and reliable.
If you do not understand how an S-corp works then I highly recommend you seek local professional advice to get educated ... you do not take dividends or non employee compensation as an owner... that is rule #1.
The IRS generally considers $50,000 to be a reasonable annual salary for S-Corp owners.
@SCGI wrote:
The IRS generally considers $50,000 to be a reasonable annual salary for S-Corp owners.
It really does not appear as if one can make a blanket statement concerning what constitutes a "reasonable annual salary" - it is entirely dependent upon the circumstances and receipts.
See https://www.thetaxadviser.com/issues/2011/aug/nitti-aug2011.html
Okay tagteam:
Thank you for your input.
However, please excuse my ignorance of Tax Lexicon babel , but would someone please simply tell me the difference between "salary" and "distributions"? Is the latter (distributions) reported to IRS in Dividends via 1099-DIV's, and if so (getting back to my earlier box example on the 1099-DIV form, which box do I enter my total lump sum YTD amount in? There are no "it depends", it's simple pass-through income.
I read your link and fit the following example:
As these employment tax obligations have climbed, the advantage of operating as an S corporation has become magnified. Since S corporation income is not subject to self-employment tax, there is tremendous motivation for shareholder-employees to minimize their salary in favor of distributions, which are not subject to payroll or self-employment tax. Consider the following examples.
Example 1 : A owns 100% of the stock of S Corp., an S corporation. A is also S’s president and only employee. S generates $100,000 of taxable income in 2011, before considering A’s compensation. If A draws a $100,000 salary, S’s taxable income will be reduced to zero. A reports $100,000 of wage income on his individual income tax return, and S and A are liable for the necessary payroll taxes. S is required to pay $7,650 (7.65% of $100,000) as its share of payroll tax, and S withholds $5,650 (5.65% of $100,000) from A’s salary toward A’s payroll obligation, resulting in a total payroll tax bill of $13,300.
Example 2: Alternatively, A withdraws $100,000 from S as a distribution rather than a salary. S’s taxable income will remain at $100,000 and will be passed through to A and reported on his individual income tax return, where it is not subject to self-employment tax. The $100,000 distribution is also not taxable to A, as it represents a return of basis. 7 By choosing to take a $100,000 distribution rather than a $100,000 salary, S and A have saved a combined $13,300 in payroll taxes.
How are the distributions identified to IRS?
@jpgroup wrote:...tell me the difference between "salary" and "distributions"? Is the latter (distributions) reported to IRS in Dividends via 1099-DIV's, and if so (getting back to my earlier box example on the 1099-DIV form, which box do I enter my total lump sum YTD amount in?
Salary is compensation essentially for services rendered. In terms of an S corporation, the shareholder-employee receives a paycheck (of sorts, since there is no requirement that it be issued on a regular basis) with payroll (and withholding) taxes deducted (and the other half being paid by the corporation) and a W-2 at the end of the year.
S corporations generally just issue Schedules K-1 on which income, gain, deductions, credits, et al, are passed through to the shareholder(s). You probably are already aware that the shareholders are taxed on the income passed through from the corporation regardless of whether there is a distribution, a distribution being nothing more than the transfer of money (or other property) from the corporation to the shareholder.
My figure comes from researching actual IRS cases. The IRS in one case determined that $47,000 was too low, and in another determined that $50,000 was sufficient. I think that my statement is valid based on actual IRS lawsuits.
@SCGI wrote:
My figure comes from researching actual IRS cases. The IRS in one case determined that $47,000 was too low, and in another determined that $50,000 was sufficient. I think that my statement is valid based on actual IRS lawsuits.
There actually is a court case in the link I provided (above). The IRS determined that a reasonable salary, for the years 2002 and 2003, would be $91,044 so the $50,000 figure is not set in stone; it will vary depending upon revenues and distributions.
I would hate to be in a position where I had to defend $50,000 as a reasonable salary for the sole shareholder-employee of an S corporation (that provides only services) with a net profit of $250,000.
OK, let's be reasonable... The lawsuit you cited was not for a sole owner S-corp. It was for a business that was well-established (24 years) with MANY employees, and the CEO was performing duties well beyond what a typical start-up S-corp would be performing. The original questioner stated that he was the only stockholder, implied that he was the only employee. VERY different scenario. Let's not try to mislead and misinform, if we can help it.
That was just one case and it illustrates the point; you do not want to be on the wrong side of this equation as the IRS can easily and swiftly recharacterize distributions as salaries.
In that instance, the taxpayers not only have to deal with the unpaid payroll taxes, they are typically assessed penalties and interest. It is better to err on the side of caution.
I will support @Anonymous_ in that specifically stating a "reasonable salary" is not possible.
Just citing a case when you have absolutely no idea of the facts of the poster's business does not support a blanket statement. The decision in each case is decided based on the facts of that specific case.
The IRS does not have any specific guidelines on what constitutes a reasonable salary; no statute, no regulations, no revenue ruling, no revenue procedure, nothing. This is a very facts and circumstances determination. This will vary by agent, supervisor, negotiation, appeals, court.
A single owner S corporation that generates $1 mil in net income and only pays out $50,000 in wages would be hard pressed to prevail in court. Once again, each case is facts specific.
You should sit down with a tax professional and they would be able to review your facts and provide you with general guidance on what "might" be reasonable. Nothing is a guarantee and this is a highly scrutinized area for the IRS.
.tell me the difference between "salary" and "distributions"? as it relates to an S-Corp
Salary is "earned income". You earn it by doing out and physically "doing something" on a recurring basis to "earn" it. Salary is reported to the person who earned it (the employee) on a W-2. Salary is required to have taxes withheld from it, and the employer (the S-Corp) must pay a "match" on the social security and medicare tax withheld from the employee's W-2 pay. There are other taxes on that salary the employer may be required to pay also - such as the UC Tax (Unemployment Compensation Tax) as but one example.
Distributions are paid to the owner of the S-Corp. The IRS requires all S-Corp owner's to take an RMD (Required Minimum Distribution) which is taxed - but the RMD is not subject to the additional self-employment tax paid by the employer on W-2 income. The owner pays all taxes on the RMD. The RMD is reported on the K-1 which the S-Corp is required to issue to all owners. What specific box or boxes on the K-1 that income is reported in, depends on the type of income being distributed to the owner(s). The three basic types of income to be distributed could be ordinary income, rental income, and investment income. Overall there are about 12 boxes for all the different types of income that could be distributed to owner's of an S-Corp.
To generate W2 & W3 go to https://www.ssa.gov/bso/bsowelcome.htm
W-2 forms can be purchased at the large office supply stores and hand-written or printed in your home printer.
Quick Employer Forms can be used to prepare W-2’s.
This TurboTax Help explains the TurboTax software that can prepare W-2's.
You may want to create an Electronic Federal Tax Payment System (EFTPS) account to pay Federal withholding, Social Security and Medicare taxes.
And what if I am a 100 percent owner of an s corp and didnt report quarterlies , nor deduct all the said taxes i was supposed to withhold through out the year yet want to declare my income appropriately at the end of year, can I report them via 1099? or would i be prohibited from doing so?
I'm a 100% owner of an s-corp. When I pay myself, I transfer money from my corporate account to my personal account and it's characterized in QB as "employee salary" -- okay. However, when I make estimated tax payments to the IRS and to the FTB (California), my understanding is that that is also my compensation, being withheld by the s-corp. What should I characterize those payments as? Now that I am doing my business takes using TurboTax for business, it is not catching those estimated tax payments as my "employee salary" and the numbers don't add up.
The payments you are making would be considered shareholder distributions, as I am assuming you did not report them on a 941 or 944 payroll tax return.
To be considered a salary payment from your S corporation to you, you need to report the payment on a W-2 form and file form 941's quarterly to pay in the taxes associated with your salary. You are treated the same as an employee that would work for the company.
The distributions you have been making to yourself are not deductible by the corporation if you did not treat them properly as wages. What will happen if you do nothing further, is you will pick up the income of the S corporation as pass-through income as opposed to wage income on your personal tax return.
If you want to correct the situation for 2021, you would have to report the wages on a W-2 form and file the associated form 941's or 944.
In either case, you will get credit for the taxes you have paid in on your personal tax return, as estimated taxes paid in.