Is the owner distribution on a schedule K the same as owners pay?

Forum|Forum|7 years ago
June 1, 2019
1 reply
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I'm trying to teach myself some basics of taxes and returns, so I can do them myself next year. My wife owns a small LLC (S corp), which her accountant did taxes for last year (and will this year too). While going through them, on the Schedule K line 6d is Owners Distribution (also listed again on the K-1). Is this the same as what she took in pay from the business (is the K-1 essentially like a W2 but just for the owners pay?) and if so, how and where would I place that information on our personal returns? I would assume NOT on a schedule C on our personal returns (which is where my income is listed as I am also self employed) because her business taxes would be filed separately as past years, correct?

Furthermore, I found this article here: http://smallbusiness.chron.com/shareholder-distribution-vs-payroll-59898.html that half way already answers this question, but it I didn't fully understand it and it did bring up another one. It kind of "implied" (if I understood correctly) that this income is tax avoidable as the article stated "this income is not subject to self-employment income for the recipient".

So to sum up...

1. Is the K-1 her reported income which has to match on her/our personal taxes?

2. Where (what form) do we report that income on our personal taxes?

3. Did I understand correctly that this income could be tax avoidable?

TurboTax Home & Biz Windows

TomYoung

Alumni - Champ

I think the article explains things very well.

There are essentially two ways a S-Corp owner might receive cash from the company:

1) A wage or salary reported on Form W-2. This income is subject to - naturally - income taxes and FICA. And, as the article points out, the IRS expects that an S-Corp owner will take a reasonable salary.

2)Distributions from the business to the owner, reported as Shareholder Distributions. These distributions are treated, in effect, as a "return of capital" and serves to reduce the shareholder's investment in the business. Since this cash is "return of capital" it's not "income" and it's not subject to income tax or FICA or SE Tax.

It's easy to see that you'd want to maximize #2 and minimize #1, but of course the IRS knows this too, hence their position that failure to take a reasonable wage "can be considered a crime of tax evasion"

The S-corp structure is a "pass through" entity, meaning that the corporation pays no income taxes in its own name. Instead the corporation's profit and financial activity is "passed through" to shareholders in proportion to their ownership. Of course the corporation's profit is calculated after salary/wages and FICA paid to its employees, including your wife.

To (overly) simplify, your wife has two sources of income from her S-corp: Her wage or salary and the corporation's profit. Distributions of cash characterized as shareholder distributions are not income and, accordingly, are not reported as such.

Tom Young

jburattiAuthor

Level 2

Thanks for the answer.  Forgive me as I am new at this and the whole question was for the point of learning.  This response educated me on the difference of income and distributions but I still have questions regarding my specific situation, or perhaps I didn't give enough info in my original question.

I know one is technically not "suppose" to do it this way but she uses her business checking/debit card for both business AND personal purchases.  She does not physically pay herself with a paycheck.  When her accountant did her 2015 business taxes he (I assume) took the value of those "personal expenses" and entered that as a shareholders distribution for her.  Being that you stated that a shareholder distribution is not income, the way it was filed, is it taxable (all possible evasion issues set aside for the moment)?

Let me backup even further with some added information and questions.  Her 2015 business taxes were filed as explained earlier.  Our personal returns were done by a different accountant but has errors and needs to be amended.  The errors included it being a single return for myself with a status of married filing separately and 2 of our dependents not included. I am trying to amend that with TurboTax and completed everything else that needed to be changed correctly but don't know how or where to include (if it even has to be included) her "income/distribution" as it was earlier described.  To restate it, she didn't physically take a paycheck and all personal expenses from the business was listed under "shareholder distribution" in the business returns.

So... does this need to be included in the amended returns?
Where/what form do I include it on if it does need to be included?
And is it "technically" considered return of capital and not income, hence not taxable?