Hello,


I am owner of S corporation (single employee) based out of TX.

If my corporation receives 100K in revenue for 2011 and if I were to do the below, do I need to report Profit Distribution on my 1040 (and pay federal taxes)? If I do not need to report, how I do I show profit distribution on my 1120S?

Wages : $50K
Expenses: $20K
Profit Distribution: $30K

-thanks
Baksh

“If my corporation receives 100K in revenue for 2011 and if I were to do the below, do I need to report Profit Distribution on my 1040 (and pay federal taxes)?’---->Correct.
If I do not need to report, how I do I show profit distribution on my 1120S?
“Wages : $50K”----> You will have to issue yourself a W2 like any other EE and report your income onW2 on 1040 line7. Wages paid to an investor/employee of an S corporation are treated like wages paid to any other employee.Federal withholding and FICA taxes are withheld from the investor/employee’s paychecks in accordance and the investor/employee receives a net check at the end of every pay period.Your S corporation must match and pay over to the IRS an amount equal to the FICA portion of the tax withholding.Under current law, the EE is required to pay and have withheld 7.65% of his wages toward Social Security, 6.2%, and Medicare ,1.45%. This means the S corp must also pay over to the IRS, out of its own funds, 7.65% of the EE’s wage.Your S corp is entitled to deduct the amount of gross wages it pays to its EE,you, in determining the amount of net income that will be passed through and taxed on the S corporation’s shareholders’ returns. When you make your payroll liability deposits to the bank /IRS and the state, you should be paying both the ER and the EE portion at teh same time! If I understand, you have an S-Corp and you are the only EE as well as the ER . You have yourself on payroll as you should. You don't have to file a 941 until you start paying wages, either to yourself or someone else.Once you do start taking a salary you will need to file form 941 and yes, you will need to pay both halves of the FICATaxes. You're not really paying double. The combined ER/EE rate is about the same as the self-employment tax.If you are a new ER, then you will become a monthly depositor until a look back period that can be used to determine deposit frequency is established. No deposit is required as long as accumulated employment taxes of less than $2,500 for the whole calendar quarter.In general, you , as an ER, must make a quarterly return of FICA taxes and withheld income taxes for the three months of each calendar quarter, using form 941( you also need to file form 940).
Here are two examples that illustrate the differences in the tax treatment of wages and shareholder distributions:
“Expenses: $20K”--->your S corp expenses are reported on 1120S line 7- line 19.
Profit Distribution: $30K”----> Shareholder distributions are treated differently than wages because they are deemed to be a return on the investor/EE’s investment in the S corp and not compensation for services rendered. Distributions to you must be included in your taxable income as long as theh distributions exceeds your S corp basis( as LTCG); once you pay tax on the S-corp profits, they increase your basis in the S-Corp. Any losses used to reduce other taxable income reduces your basis in the S-Corp. Any contributions you make to the s-corp increase your basis & distributions reduce it however, the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax.No W-2 or 1099 need be issued by the S corp to you, as a shareholder, and the S corp has no FICA matching requirement since no FICA tax is due.IF you take distributions every year, it will look like the distributions are made in lieu of salary. Which could cause the IRS to recharacterize the distributions as salary. At that point, the interest & penalties will be ugly. Distribution of previously taxed profits reduce your basis. They are reported on your Schedule K-1 of 1120s to help you keep track of your basis, but otherwise do no appear on your personal return and are not taxed at the time of distribution because you already paid tax on it in a previous year on 1040( as it is reported on 1120S line 21 Sch K-1 of 1120S line 1 part 3/Sch E line 28/1040 line17).That being said, if your distributions ever exceed your basis in the company they are taxed at capital gains rates and are reported on Sch K-1 of 1120S and on Schedule D (Form 1040) line 12 and 1040 line 13.The only repercussions for the S-Corp of taking distributions is it reduces the Cash & Shareholder Equity accounts.

Hi,

Thanks for the info.

I have couple of more questions.

1. I want to use the provision to put away 25% of W2 salary in SEP IRA and deduct it on my 1020S. This way, I will have higher wages and my distribution would be smaller. Is this something that is recommended for some one who can afford to stash away in retirement account?

2. Is there any way I can have part of my S-corp income roll over to 2012 and keep it as a company profit (and not show it in 1040 for 2011)?

“1. I want to use the provision to put away 25% of W2 salary in SEP IRA and deduct it on my 1020S. This way, I will have higher wages and my distribution would be smaller. Is this something that is recommended for some one who can afford to stash away in retirement account? “--->The SEP is an S-corp level deduction. It's limited to 25% of eligible employee wages. Ownership isn't relevant. It is a deductible corporate expense like all retirement plan contributions for the rest of the company's EE(s). SEP contributions are based 100% on wages paid.The IRS may question on the S Corp earnings/distributions qualifying for the SEP-IRA as you receive in addition to the S Corp distributions, a W-2 from the S-Corp which shows a significant salary justifying the SEP-IRA contributions. An easy way to fix this may simply amend the 1040s from the year in question, remove the SEP deduction, and take out the SEP money to pay any extra taxes that may be owed. Alternatively, the K-1s can be amended to change distributions to salary, FICA taxes can be paid, and the SEP contributions can be retained. Alternatively, the K-1 can be amended to change distributions to salary, FICA taxes can be paid, and the SEP contributions can be retained.
“2. Is there any way I can have part of my S-corp income roll over to 2012 and keep it as a company profit (and not show it in 1040 for 2011)?”-->No; S corp must file Form 1120S. Form 1120S reports income, deductions and credits the S Corp must report for the year. In addition to Form 1120S, an S Corp must file Form 1120S Sch K-1 to the IRS and you, a shareholder. Form 1120S Schedule K-1 shows your income from distributions by the S Corp.S Corp(may) pays estimated taxes on behalf of the Shareholder for the portion of estimated business income. You are also paid a salary with income tax withheld. As long as the taxes paid by S corp on your behalf will be treated as a dividend (technically for tax purposes it is an S distribution, not a dividend but it is essentially the same thing). Dividends are not shown as an expense on your P&L so payment will have no effect on it.
As long as the S corp is paying you a salary (which it should) you can also have extra amounts for federal and state tax withheld from your paycheck to cover the tax on the additional income and avoid the whole estimated payment step all together. Because the S-Corp income flows to your personal return, you need to use Form 1040-ES to make the estimated payments.

Thank you for your response.

Can I have little bit more info on this statement
"As long as the S corp is paying you a salary (which it should) you can also have extra amounts for federal and state tax withheld from your paycheck to cover the tax on the additional income and avoid the whole estimated payment step all together"?

If I am issuing a W2 to myself (owner of S corp based out of TX) and take out federal tax withheld from the paycheck, Is there any benefit that S-corp shareholder receives in terms of reducing the federal income tax?

"As long as the S corp is paying you a salary (which it should) you can also have extra amounts for federal and state tax withheld from your paycheck to cover the tax on the additional income and avoid the whole estimated payment step all together"?”---->You, as a s/h or EE of S corp, do not pay self-employment tax if you are actively engaged as a shareholder/EE of the S-Corpsince s/h-EE is paid a salary, withhis/her wages reported on a W-2 and with FICA Taxes withheld. S/H or EE will therefore receive two tax documents from the S-Cor,: a W-2 and a Sche K-1 of 1120S statement. S/h-EE is taxed on his/her wage income and on any profits distributed by the S-Corp. Dividends are a distribution of corporate profits to shareholders, but a qualified dividend has already been taxed at the S corp level, so a qualified dividend is taxed at a preferential tax rate on the individual tax return. S-Corp profits, however, have not already been taxed, and so they will be taxed as ordinary income on the shareholder's tax return on Sch k-1 of 1120S line 1, SCh E of 1040 line 32 and 1040 line 17.
“If I am issuing a W2 to myself (owner of S corp based out of TX) and take out federal tax withheld from the paycheck, Is there any benefit that S-corp shareholder receives in terms of reducing the federal income tax?”----> Gross wages were deductible in the year paid. If the S Corp was a cash basis taxpayer, they can deduct the ER portion of FICA taxes in the year paid on 1120S line 12. Any entity that pays wages can and will deduct payroll taxes expense. However, the payroll taxes deducted are only the ER's share of the taxes, not what the EE is responsible to pay.If the S corp generates a loss from its business operations during the year, then the loss passes thru to s/h –EE to offset any W2 or other income the s/h-EE may have, reducing over all federal and state income tax for that year.On the contrary any profits passed thru to a s/h –EE instead of being paid out as wages to that same s/h-EE results in SECA Tax savings.