Great question. It is important to note that working shareholders in an S-Corporation should really be taking wages and not distributions. This may explain why you are having difficulty figuring this issue out at year-end. The Internal Revenue Code establishes that any officer of a corporation, including S
corporations, is an employee of the corporation for federal employment tax purposes. S
corporations should not attempt to avoid paying employment taxes by having their
officers treat their compensation as cash distributions, payments of personal expenses,
and/or loans rather than as wages. This is something that a lot of small business owners are not aware of, so it is important to get on the correct track where distributions are concerned as it pertains to working shareholders.
In addition to the necessity to working shareholders to take wages, it is also important that the shareholders take a reasonable salary. You will find it helpful at tax time once you do begin paying yourself wages, because you will have done the payroll tax withholding throughout the course of the year and save yourself from potential fines, penalties, interest, and late fees.
Hope this helps!
