I own 100% of my S-corp. What is the difference between taking an owners draw and paying a shareholder?

[tagteam]

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@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.

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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.

[SCGI]

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.

[tagteam]

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.

[Rick19744]

I will support @tagteam 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.

[Carl]

.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.

[xrak]

To generate W2 & W3 go to https://www.ssa.gov/bso/bsowelcome.htm

[JamesG1]

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.

[MDANNY894]

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?

[Myrrhia]

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.

[ThomasM125]

@Myrrhia

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.

[forsythdan1]

Not sure the actual question was answered. I have the same issue. I don't need to know about salaries, I'm only interested in discussing the money (profits) taken out of the company by me after salaries. I am the only shareholder. I believe he was asking the same thing about Turbo Taxes program. 

No one answered this guys Actual Question. I have the same question.

In turbo tax for S Corp under the business section it  asks if you have taken any money or property out  of  the corporation during the tax year other than salaries or loans?  

then under The Federal Taxes Section it Turbo tax asks you to enter the total dividend distributions made to shareholders during the tax year 2022 from your accumulated earnings.

Are these the same thing. It won't let me do both so I'm unclear where to put the money taken from profits.

[Rick19744]

To address your specific questions:

• Your first question is asking about normal distributions.  This addresses most S corporations.
• Your second question is asking if you distributed out dividend distributions.  This would only be the case if the S corporation was a prior C corporation that converted to S corporation status and had accumulated earnings and profits.  It would also apply if the S corporation acquired a C corporation that had earnings and profits.  This is not a normal situation that would occur with 95%+ of TT users.
• To address the third question, they are not the same thing as explained above.

[Mike9241]

sometimes a C-corporation converts to an S-Corp when it has accumulated earnings and profits (AE&P) - earnings that have not been distributed to the owners. this amount would appear in the M-2 column C.  the S-Corp can make an election to distribute the amount representing the (AE&P) before undistributed S-Corp earnings these are dividend distributions that Turbotax may be referring to and would require the filing of Form 1099-DIV.  Distributions of S-Corp earnings are non-dividend distributions. 

to answer your question

In turbo tax for S Corp under the business section it  asks if you have taken any money or property out  of  the corporation during the tax year other than salaries or loans?   here for distribution of S-corp earnings

then under The Federal Taxes Section it Turbo tax asks you to enter the total dividend distributions made to shareholders during the tax year 2022 from your accumulated earnings.  not here this is the C-Corp to S-Corp scenarios

Are these the same thing. It won't let me do both so I'm unclear where to put the money taken from profits.

the normal ordering rules for distributions made by the corporation to its shareholders:
1. Reduce the AAA determined without regard to any net
negative adjustment for the tax year (but not below zero). If
distributions during the tax year exceed the AAA at the close of
the tax year, determined without regard to any net negative
adjustment for the tax year, the AAA is allocated pro rata to each
distribution made during the tax year. See section 1368.
2. Reduce shareholders' PTEP account for any section
1375(d) (as in effect before 1983) distributions. A distribution
from the PTEP account is tax free to the extent of a
shareholder's basis in the shareholder's stock in the corporation.
3. Reduce AE&P. Generally, the S corporation has AE&P
only if it hasn't distributed E&P accumulated in prior years when
the S corporation was a C corporation (section 1361(a)(2)). See

section 312 for information on E&P. The only adjustments that can be made to the AE&P of an S corporation are:
a. Reductions for dividend distributions;

b. Adjustments for redemptions, liquidations, reorganizations, etc.; and
c. Reductions for investment credit recapture tax for which the corporation is liable.
See section 1371(c) and (d)(3).
4. Reduce the other adjustments account (OAA).
5. Reduce any remaining shareholders' equity accounts.

[forsythdan1]

Thank you! The first part of your answer is exactly what I was looking for!

[forsythdan1]

Thank you!!