CA LLC taxed as an S Corp, wondering tax implications for dividend distribution. Wondering how its taxed, lets say salary is 45,000 USD and 100,000 in dividend.

[luuinhaler]

Would the 45,000 be the tax bracket of 45,000 or would it be taxed in the same bracket as if its combined 145,000 USD.

[Anonymous_]

First of all, the IRS scrutinizes salaries for officers of S corporations closely and those salaries must be reasonable (and a $45,000 in salary based on $145,000 total does not sound like a reasonable salary)

Regardless, the corporation deducts your $45,000 salary on its tax return (1120-S) but your tax liability would be based on both your salary and the $100,000 in net income (i.e., it is combined).

@Rick19744 

[Mike9241]

@luuinhaler the distribution is not taxed unless it exceeds your tax basis in the S-Corp. 

[Rick19744]

I agree with @Anonymous_ in that you need to consider tax guidance on what may be "reasonable" wages given your business model.  This area is a facts and circumstances situation.   If this is more along the lines of a consulting business or where your services are what drives the business, then I would also agree that the 45/100,000 wage and distribution ratio may not pass an IRS exam.

Additionally, your distributions will not be taxable as follows:

• to the extent that your accumulated adjustments account (AAA) is positive
• you have tax basis

Finally, you also need to be aware that the AAA cannot go negative as a result of distributions.  So there can be instances where the distribution reflected Sch M-2 will not agree with what is reflected on your K-1.

There are many other nuances with S corporations, so you may want to meet with a tax professional to get an understanding of how everything flows sooner rather than later.

[Critter-3]

An S-Corp doesn't pay dividends  ... the shareholders have draws.  On the K-1 the profits are passed thru to the sharesholders to be taxed on the personal return even if the profits are not distributed. 

Only a C-Corp pays the stock holders dividends reported on a 1099-div. 

Now as to the salary % ... if you have 10 employees it is possible that the business made quite alot on their labors and that can be passed thru to the shareholder and a $45K salary may be reasonable for the job you actually do for the company.   However, if you are the only employee (W-2 issued) and you only took $45K when the business profited 100K it may look off if you are audited.  What you should do is issue yourself a nice year end bonus on your paycheck and report it on the W-2.