S-Corp Tax refund - is it Taxable?

[Jay2022]

My S Corporation (1120S Form) received a tax refund in 2021 due to overpaid taxes on a prior year (social security taxes withheld were overpaid).  I am the only owner and only employee. The refund payment check included interests on the overpaid amount.  Please advise on the following:

(1)- The portion of the refund related to the excess social security taxes withheld by the company is refundable to me as an employee. That amount is not taxable since it is a tax refund for the overpaid amount. It does not need to be reported in 2021 tax forms and is not taxable.

(2)- The interest payment included by the government in the tax refund is new income that should be reported for 2021. I believe it should be reported as "portfolio income", under Sched K of form 1120-S under "Other income" Class 'A'.  Please advise.

(3)- The portion of the tax refund related to the excess (overpayment) of social security taxes by the company in the prior year is not taxable and does not need to be reported as income for 2021. It is just overpaid taxes the government is refunding to the company. Please confirm that is the case. If that is not the case, please advise on where to report it in form 1120-S.

Thank you so much.

[AliciaP1]

Answers to your questions in order:

1. You are correct!
2. This interest should actually be reported on Schedule K line 4a - Interest Income (from banks).  This should flow through to the same line on your K-1.
3. If it is only a refund of withheld SS taxes, then you are correct.  If any amount was previously considered part of the employer match of SS taxes, then it would technically be taxed as income (due to the fact that employer match SS taxes are deducted from income).  To book this you should reduce your current year deduction by the employer portion of taxes from the refund.  For example:
   • Assume you got a $500 refund
   • $250 was withheld from your paycheck - this amount is not taxable nor reportable by either the business or you
   • $250 was classified as the employer match  - this should then be credited to FICA tax for 2021

[Rick19744]

I think we need some clarification here:

• You indicate that "My S Corporation received a tax refund..."
• If that is the case, the entire refund is related to corporate overpayment.
• If the taxpayer had excess SS withheld in any given year, that would have been adjusted on their individual tax return.
• Based on the limited, and unclear facts, if the corporation received a refund check, made out to the corporation, that means the overpayment relates to the corporations portion of any SS taxes.
• So unless I am misunderstanding the facts, the excess SS paid by the corporation that was refunded is taxable income to the corporation.  This is because the withholding taxes were taken as a deduction in prior year(s).
• Also, any interest income is taxable at the corporate level as well.
• Your question(s) and facts are mixing corporate and individual when it appears that only the S corporation received a refund.  This needs to be clarified in order to provide a more accurate response.
• Also, please clarify how the refund came about.  Did someone amend your corporate payroll taxes?