This is my first year owning an S Corporation. I am 100% owner. Am I supposed to pay estimated taxes on my personal return on business profit it earns over the course of the year? I thought I was supposed to but when I filled out the 1040-ES form it didn't say I had to make an estimated tax payment because it was basing the requirement on last year's taxes. However, I will show a substantial profit at the end of the year and since I am not withholding as a wage earner, I will also have a very large tax bill. Will I have a tax penalty if I wait to pay the entire amount at tax time next year?
Will I have a tax penalty if I wait to pay the entire amount at tax time next year?
Not necessarily because the penalty is based upon your withholding (and estimated payments) for the current year and your tax liability for the prior tax year, whichever is smaller.
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
Going forward it is HIGHLY recommended you take a salary and give yourself a W-2 at the end of the year...
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 :
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.