Tax Rate of distributions of single member owner of an LLC taxed as an S Corp

[TheConfusedTaxGuy]

I file jointly with my wife for a total income of 350K. I plan to do consulting on the side next year and have an LLC established being taxed as an S Corp. I plan to take a reasonable salary from my S Corp as an employee and take additional distributions throughout the year as the sole owner as needed. I understand the salary will be taxed via payroll and distributions are not taxed (on the company level) but will be reported on the K-1 when I file my personal taxes. At what tax rate is that then hit with when I do my personal taxes? I ask because I wonder if due to my high household income the additional passthrough income from the K-1, via the company’s distributions to me, may be taxed at a higher tax rate vs the self-employment tax rate if I was not tax structured as an S Corp and just a normal LLC. Or am I completely misunderstanding it?

Example: $100K in net profit from LLC. I take a salary of $70K and $30K remains, which can be distributed to me as the sole member. Due to my new household income of $420K ($350K joint income plus the additional $70K I take as salary from the corporation) when the $30K is reported on K-1, is that hit by my personal income tax rate, which can be higher than the 15.3% self-employment tax rate?

[Anonymous_ · Accepted solution]

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@TheConfusedTaxGuy wrote:

...Or am I completely misunderstanding it?

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You are misunderstanding it. Distributions that are not in excess of your basis in the entity are not taxable; only income you receive as salary (via W-2) and profit (and other miscellaneous income) passed through to you on your K-1 are taxable.

[Anonymous_ · Accepted solution]

In your example, the $70,000 salary is taxable to you via W-2 and the $30,000 is also taxable to you (as it is passed through to you on your K-1, whether or not that $30,000 is actually distributed).

[TheConfusedTaxGuy]

@Anonymous_ I completely understand that part. My specific question is when the $30K is taxed on my personal income tax when reported on the K-1, due to our high combined gross Income, could it be taxed at a greater rate than let’s say self-employment tax. I ask because if it can be greater I wonder if I should simply stay as an LLC vs LLC taxable as S Corp. 

[Anonymous_]

Not really since the W-2 income will kick you up into a higher tax bracket in the same way a the profit passed through from the S corporation would do so.

Regardless, the $30,000 (in the hypothetical) would not be subject to self-employment tax.

[Mike9241]

it's not the distributions (unless in excess of tax basis. this will be determined when you complete form 7203) what is taxed is the remaining profits after taking your salary.