Once I complete a 1120S for my business, do I need to include something on my personal taxes?

[lfisher1027]

My husband and I got married last year.  I have an S Corp Inc. Business.  Sounds like I need to file a 1120S on Turbo Tax Business, right?  What is the best way for filing personal with my husband?  Also, isn't there something I report on my personal taxes from the 1120S?

[KarenL2 · Accepted solution]

Yes, you are correct.  You will file a Form 1120S for the S-Corporation.  That return will produce a Schedule K-1 showing profit and other items based on the tax situation of the S-Corp. The K-1 will be entered on your personal tax return (Form 1040) using one of the TurboTax personal products.  You can file a Married Filing Joint tax return (it usually works out best for most people) and the K-1 data will be netted with your personal income and deductions on your Form 1040.

Note: As an officer of the S-Corporation, your husband is also required to draw a salary with payroll tax withholding, and receive a W-2 from the S-Corporation.

[Lulu1120s]

W-2 wages included in an 1120S filing reflective on K-1 have to be included on individual line 7 1040?

[Critter]

On the personal return the W-2 wages will be reported on line 1 and the K-1 line 1 goes on the Sch 1 line 17. 

Wages paid by the corp are deductions on the corp return ... it reduces the profit that is shown as a pass thru on the K-1 line 1.  

[pk]

Agreeing with the excellent advice from @KarenL2 , I just wonder if the husband is really employed by the S-Corp ?  Also if the owner of the S-Corp is an employee and therefore may need to have adequate wages ( W-2) or if director/ board member , remuneration must be included.

[Critter]

An S-corp can make distributions, but the rules are complex.

This article has a reasonably clear discussion of what is required: 

http://www.aicpa.org/Publications/TaxAdviser/2014/January/Pages/Nitti_jan2014.aspx

Also see the following IRS discussion: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made.  The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes.  From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes.  Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions .  The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.) 

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.