Only shareholder S corp Texas. Pay myself salary. Generate K-1 income. How best to pay tax W-2 extra withholding or quarterly 1040ES?

[james14]

Does paying myself a shareholder distribution lower the K-1 reported income?
If so, on what line on the k-1 form would that distribution appear

[MinhT · Accepted solution]

The IRS requires S-Corp's shareholders who work in the company to be paid a reasonable salary.

The salary and employer's payroll tax are claimed by the S-Corp as business expenses, so the profit reported on your K-1 will be lower. The S-corp has to issue you a form W-2 which you report in the Personal section of TurboTax.

The profit of the S-Corp will "flow through" to your personal tax return through the K-1.

Distributions to the shareholder do not lower the reported income of the S-Corp. They are reported on form K-1 in Box 16 Code D. On your personal return, distributions do not count as income as you have already been taxed on the profit of the S-Corp through form K-1.

[james14]

When paying the extra tax liability generated on the K-1 would adding additional withholding to my W-2 create an audit problem?  Would it be more proper to pay it as a 1040-ES payment quarterly? ( It is financially advantageous to me to pay it incrementally in bi-monthly withholding).

[MinhT]

When the S-Corp pays you a salary, it has to withhold federal (and state if applicable) tax, social security tax and medicare tax. It has to deposit payroll tax to the IRS (and the state) and issue a form W-2. If it did not withhold taxes, it cannot issue you the W-2 showing tax withheld. You have to pay estimated tax on the estimated profit of the S-Corp (from form K-1).