| “Should I take a bonus, say of $30,000, instead of having the entire $86,100 pass to my (100% shareholder) as a distribution?”==========>I guess you have to carefully apportion the net income between a reasonable bonus/salary and distributions; The most important thing with an S-corp is to ensure that your entire compensation package is reasonable for the services you provide the corporation.I think that a problem only arises when the S-corp owner/employee takes distributions that are not a part of compensation and the IRS audits that corporation. If the IRS auditor determines that compensation is unreasonably low, the auditor will recharacterize some or all of those distributions as salary and assess back FICA and Medicare taxes on the corporation (plus penaltyand interest). However, it is possible to have the S-corp pay you a relatively small monthly salary and then make up any difference with a year-end bonus. Bonuses are compensation and as such are subject the soc sec Withholding . Th e distribution from the S-Corp amount is not deductible to the S-Corp, nor is it taxable to you, the shareholder UNLESS the distribution of $86,100 exceeds your stock basis(inside basis of the S corp). The distribution will reduce your AAA and s/h(inside) basis. S corp can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.
“Because my salary exceeds the $110,100 base wage limit (for 2012) for Social Security, is there any tax benefit to taking a year end bonus vs. letting the entire $86,100 pass through as a distribution?”===============>As said above, bonuses are pretty easy. These are taxed just like salary so there's nothing special on the taxation of theses. Bonuses are compensation and as such are subject the Federal Income Tax Withholding, SS and Medicare (both Employer and Employee portions) , in this case, medicare tax(not oasdi AS YOUR SALARY EXCEEDS $110100 CEILING LEVEL) 1,45% on $30K bonus.There are some special rules regarding the income tax withholding on bonuses, but that usually isn't an issue for most small businesses. The IRS allows a business to deduct "a reasonable allowance for salaries or other compensation for personal services actually rendered; Distributions and other payments by an S corp to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.“ Wages are subject to employment taxes. one way to determine a reasonable salary for corporate officer is to look at what other companies of similar size and type pay for such services. Check on websites like The Ladders and Salary.com for comparable positions, or engage the services of a compensation consultant.
“Are S-Corp distributions (from Schedule K-1) taxed at a different rate than my earnings (salary)?”===================> As long as your S corp distributions is subject to LTCG tax, then yes.Distributions are return of basis. Every shareholder has a basis. The idea behind basis is the money you invest in the company has already been taxed so the IRS doesn't want to tax it again when you take it out. Your basis increases when you put money or property into the corporation. And it increases when the S-Corp has taxable income because the S-Corp income flows to your personal return and you pay tax at your personal rate. If your S-Corp has a loss, it reduces your personal taxable income so that reduces your basis in the S-Corp. Likewise if you take a distribution out. If you take a distribution and that distribution brings your basis below zero, then the that amount over your basis is taxed as capital gains. After 2012, the LTCGs tax rate will be 20% (10% for taxpayers in the 15% tax bracket).
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