K1 pass through income that is not salary nor distribution LLC S-corp

[SCORP2]

I only paid myself $5000 in 2022 in salary from my new business and took no distribution.

The K1 shows $14,000 business income (box 1) and $5000 W2 salary

Since my income for the year is so low I still don't own any taxes.

Does IRS consider the $14,000 a distribution or is that a third kind of income?

I don't want to take distribution because I'm not ready to pay myself a reasonable salary out of the business.

So is it ok to leave the return like this?

[Anonymous_ · Accepted solution]

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@SCORP2 wrote:

Does IRS consider the $14,000 a distribution or is that a third kind of income?

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If you have $14,000 in Box 1 of your K-1 (1120-s), then you have $14,000 of ordinary income to report just for that K-1 income item (the $14,000 in Box 1 is not a distribution - distributions from S corporations are reported on Line 16 (D code) of your K-1 (1120-S).

It makes no difference whether or not you took a separate distribution; the $14,000 is taxable income.

[SCORP2]

I'm not understanding this concept.

Can IRS come and say that I didn't pay self-employment on that ordinary income and that it should have been salary?

Or is it not a problem because I didn't actually withdraw the $14,000? But then what happens if I withdraw that $14,000 as salary this year, do I pay income tax on it again?

[Anonymous_]

You report $14,000 of ordinary income and $5,000 of W-2 income on your current year return. The amount that you distribute to yourself is not relevant; you are still taxed on both amounts.

The IRS can always recharacterize some or all of the $14,000 if they do not believe the $5,000 is a "reasonable salary" for the services you perform for the corporation.

[JamesG1]

The $14,000 will be reported in Part II of Schedule E Supplemental Income and Loss.  The income will flow to Schedule 1 Additional Income and Adjustments to Income line 5.  From Schedule 1 the income flows to the Federal 1040 tax return line 8.  This income is not subject to self-employment tax.

The $5,000 reported on your W-2 from the LLC S-corp was subject to Social Security and Medicare taxes in boxes 4 and 6 of the W-2.

It is possible for the IRS to recharacterize distributions as wages.  See this tax case.

@SCORP2