Can you explain how withdrawing money and paying fed, med, soc and state is not the same?
Making quarterly estimated tax payments is not "paying fed, med, soc and state". They're merely an advance deposit on your liability, whatever that may be.Can you explain how withdrawing money and paying fed, med, soc and state is not the same?
Making quarterly estimated tax payments is not "paying fed, med, soc and state". They're merely an advance deposit on your liability, whatever that may be.To add on to this answer:
Section 3121 of the Tax Code defines an officer of a corporation as an "employee", and that the pay for an employee is called "wages".
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/3121">https://www.law.cornell.edu/uscode/text/26/3121</a>
That subtitle of the Tax Code is called the "Federal Insurance Contributions Act" (FICA) that requires Social Security and Medicare to be withheld from the employee's pay, and the EMPLOYER must remit that amount, as well as the employer's share, to the IRS. The means to do that is by the quarterly Form 941. Sections 3401 and 3402 has a similar requirement for Federal Income Taxes to be withheld. A similar provision requires Federal Unemployment to be paid by means of Form 940.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/31.6011(a)-1">https://www.law.cornell.edu/cfr/text/26/31.6011(a)-1</a>
Because of that, a W-2 must also be filed.
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/31.6051-2">https://www.law.cornell.edu/cfr/text/26/31.6051-2</a>
Please see this:
I have read this, it states nothing about a paycheck, at year end i can classify what amount is salary vs distribution, yes or no? Please show me where it says i must pay myself a check not just transfer money from act to act.
"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 services rendered to the corporation."
<a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers">https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers</a>
Officers of S corporations are required to receive regular payroll checks
<a rel="nofollow" target="_blank" href="http://smallbusiness.chron.com/can-owner-employee-pay-himself-payroll-12239.html">http://smallbusiness.chron.com/can-owner-employee-pay-himself-payroll-12239.html</a>
Thank you but WAGES doesn't mean paycheck, so i transferred money from bus act to pers act and i paid quarterly tax estimates so i should be fine. On the return indicate the diff of WAGES vs DISTRIBUTIONS. So I am still looking to see where it says i HAVE TO RUN payroll with paychecks.
I appreciate the second link, first time i have seen someone say you must cut a paycheck, but I'm not sure this is a trustworthy source rather than an opinion of what was read on the IRS site that does not says paycheck.
My "payroll" is a transfer. I took my 2015 #s and am paying 110% split into quarters. If I make anything extra that is distribution not subject to the same.
To clarify my 2015 # and 110% refer to tax liability, so I am definitely covered in "reasonable salary" it just does not come in the form of what W2 employees know as a "paycheck".
@davegardiner3 did you ever get your answer for this? I'm wondering the same. First year filing as an LLC electing S Corp and I'm afraid I need to issue myself a W2.
You DO NOT need to issue yourself a W2. I would use a CPA to learn all the different things you can do the first time then you are good to go. When you issue yourself a W2 you take away the purpose of electing SCorp and tax savings benefits it offers you
"You DO NOT need to issue yourself a W2."
In most cases, that is false (as everybody else here says). You are legally an employee of the corporation. As such, if you take money from the corporation for personal purposes, that means your "compensation" needs to be on a W-2.
"I would use a CPA to learn all the different things you can do the first time"
I completely agree. There are way too many do-it-yourselfers that do things wrong, and end up paying WAY too much in taxes and/or penalties.
"When you issue yourself a W2 you take away the purpose of electing SCorp and tax savings benefits it offers you"
Wow, that is totally wrong.
Payroll of some kind must be taken and the appropriate payroll tax forms filed timely. You cannot file it all at the end of the year with the tax return.
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.
These still don't seem to answer the question directly. For the first 2 months I have transferred money from Business act to Personal act. I paid my first quarterly estimate from the Business act against my personal soc security. All taxes have been paid, I just don't have a W2 paycheck and I don't see anything that says you have to have a "paycheck". I intend to claim a reasonable salary vs distribution, but nothing that has been replied to states it has to be classified each week.
The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return - exactly on the RETURN......nothing says you must indicate on a weekly, biweekly, monthly paycheck because you can't.
OK ... let's get the terminology sorted out ... a "paycheck" doesn't have to be any special check or even be made using a payroll company. You can still just write a check from the business account to yourself and deposit it into a personal bank account. You may even pay estimated payments quarterly out of the personal account to cover federal & state income taxes, it should not be paid from your business account (that would then be considered a draw not a paycheck). But they cannot cover the FICA taxes. You cannot wait to file the FICA taxes on your tax return ... you will incur big penalties & headaches you don't want.
But ... what you MUST do is file payroll tax reports and pay the employer & employee FICA taxes in a timely manner. You may be able to do monthly payroll reports but you will need to see what forms your state requires of you. If you have no idea what I am talking about then get educated ... call a payroll company like ADP or a local company so you can get things set up correctly.
I highly recommend you seek professional help getting your payroll & books set up correctly so you can avoid expensive penalties & interest in the future. Since you told the IRS you wanted to be taxed as a business you need to comply with all the tax laws that entails.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself">https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers">https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers">https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers</a>
Thank you Critter this is an answer I can now truly respect, and rest assured i have paid all Payroll taxes as well as Fed and State. I have also discussed with 2 accountants and settled with 1, I just see too many contradictions on the internet about cutting a "paycheck" or using a payroll. I can agree with everything you have now said and it is clear what I am doing is fine. Paying taxes out of the Business account is professional recommendation and does not impact the P&L
Payroll taxes paid thru the business including federal & state withholding is OK but if you also need to send estimated tax payments those must be done thru the personal account. So if you are filing the correct payroll tax forms (940/941/944/SUTA/FUTA) correctly you are on the right path.
You need to pay wages. Taking money out and paying self-employment tax isn't the same.
As I've seen stated elsewhere, the fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return when other distributions are made. 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 a non-wage distribution 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 need to pay wages. Taking money out and paying self-employment tax isn't the same. Can you explain how withdrawing money and paying fed, med, soc and state is not the same? all taxes are paid, but why cut a paycheck and pay for additional services?
You are an employee and the business must file payroll tax forms timely ... <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p15.pdf">https://www.irs.gov/pub/irs-pdf/p15.pdf</a>
Hi @davegardiner3 ,
Thanks for starting this thread last year. I am in a very similar situation this year at filing time. What did you ultimately decide to do, either based on the advice in this forum or professional advice? Thanks in advance.
You do not need to give yourself a weekly or biweekly paycheck. When you file your taxes you say what $ amount was salary and what $ amount was dividend. As long as you make your quarterly tax payments and file your returns the govt could care less if you paid yourself in 1 lump sum, 365 daily amounts or bi weekly. They just want to know what was salary so they can calculate taxes off that.