Okay tagteam:
Thank you for your input.
However, please excuse my ignorance of Tax Lexicon babel , but would someone please simply tell me the difference between "salary" and "distributions"? Is the latter (distributions) reported to IRS in Dividends via 1099-DIV's, and if so (getting back to my earlier box example on the 1099-DIV form, which box do I enter my total lump sum YTD amount in? There are no "it depends", it's simple pass-through income.
I read your link and fit the following example:
As these employment tax obligations have climbed, the advantage of operating as an S corporation has become magnified. Since S corporation income is not subject to self-employment tax, there is tremendous motivation for shareholder-employees to minimize their salary in favor of distributions, which are not subject to payroll or self-employment tax. Consider the following examples.
Example 1 : A owns 100% of the stock of S Corp., an S corporation. A is also S’s president and only employee. S generates $100,000 of taxable income in 2011, before considering A’s compensation. If A draws a $100,000 salary, S’s taxable income will be reduced to zero. A reports $100,000 of wage income on his individual income tax return, and S and A are liable for the necessary payroll taxes. S is required to pay $7,650 (7.65% of $100,000) as its share of payroll tax, and S withholds $5,650 (5.65% of $100,000) from A’s salary toward A’s payroll obligation, resulting in a total payroll tax bill of $13,300.
Example 2: Alternatively, A withdraws $100,000 from S as a distribution rather than a salary. S’s taxable income will remain at $100,000 and will be passed through to A and reported on his individual income tax return, where it is not subject to self-employment tax. The $100,000 distribution is also not taxable to A, as it represents a return of basis. 7 By choosing to take a $100,000 distribution rather than a $100,000 salary, S and A have saved a combined $13,300 in payroll taxes.
How are the distributions identified to IRS?
