If my S Corp makes 100k and I don't want to realize any dividend distributions, do I pay tax on 100k?

Question

Assume:
100k 1099 Income (consulting)
50k Salary paid to employee owner
25k in eligible deductions/write offs
Leaves 25k to be distributed to shareholders (me)
Do I get taxed on that 25k if I don't take it out of the business? If I do take a distribution, what is the tax rate?

Answer 1

I think that taking some salary is a good idea. I have seen no magic number which the IRS nor the states allude to as "reasonable compensation". More often than not they will look to what do others in the same industry and position make and under audit adjust your salary to that.

You will pay federal income tax on the 50,000 salary as well as the 25,000 profit of the company (only once, no double taxation upon distribution as you have an S-Corp). You will also pay medicare and social security tax on the 50,000 salary, as well as the corporation matching the tax on SS and medicare.

Answer 2

I have been a tax accountant for 27 years and I have been designing "S" corp tax strategies for almost as long. First of all, you are taking a beating on social security and medicare taxes by taking such a large salary. It just isn't necessary. An S Corp is just like a partnership in that, at the federal level, neither one pays taxes and instead passes through to the owners all profits and certain other pass-thru items such as depreciation under section 179 and charitable contributions.

Your corporation will issue you an "1120-S, schedule K-1" which itemizes each pass-thru item to be reported on your personal return. S Corp ordinary income (as opposed to capital gain) is reported on form 1040, Schedule E, page 2 and is not subject to "self employment tax" (social security and medicare). This is commonly known as the "S Corp loophole." You need a skilled and experienced tax professional to advise you regarding how much salary to take. If he is she says "none," go see someone else. There are rules requiring shareholder/owners to receive salary providing their contribute personal services to the corporation. The "magic number" depends on state-established mininum set for executive compensation.

Answer 3

Yes, profits from an S corp pass through to your personal tax return.