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I own 100% of my S-corp. What is the difference between taking an owners draw and paying a shareholder?

Forum|Forum|6 years ago
June 5, 2019
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Turbo tax asks me to enter an amount for cash I took from the business and later asks me if I paid shareholders owning more than 2%. Is this a redundancy if I am the only shareholder? What is the difference between taking an owners draw and paying shareholders?

TurboTax Business Windows

Best answer by Howard1948

Paying yourself wages as an employee of the S corporation results in Federal income tax, Medicare and Social Security being withheld from your pay and remitted at least quarterly to the Treasury. It also means the employer S corporation pays matching amounts of Medicare and Social Security as a business expense to the Treasury. It also may mean other applicable taxes such as unemployment benefit taxes, SUI, FUI and who knows how many other Federal and state taxes there are on employee wages.

On the other hand, a distribution of income of the S corporation to a shareholder is a tax-free payment. Since the shareholder picks up his/her share of the income of the corporation whether it is distributed or not, a distribution itself is not a taxable event. And no payroll taxes are withheld. And the distribution is not subject to the Self-Employment Tax.

Now, don't get the idea that you can forego any wages in favor of all distributions. The IRS figured that out also and volumes of material have been written on how they might re-characterize a distribution as wages to collect the payroll taxes. Your best bet is to make a stab and the division yourself so you show that you recognize that a wage payment to a controlling shareholder is part of the game. As long as you're reasonable in the split (and don't get me started on what reasonable means) the IRS will most likely leave you alone. But if you say everything is a distribution and there are no wages, be prepared to fight a losing battle if and when they come knocking.

Incidentally, after year end, you cannot go back and re-characterize a distribution as wages since you did not report those wages on a quarterly payroll return nor did you give yourself a W-2. So you may be "up the creek" for 2015 but forewarned for 2016.

B

bobz11540

If I pay myself a salary where do I generate the W-2?

X

xrak

To generate W2 & W3 go to https://www.ssa.gov/bso/bsowelcome.htm

J

JamesG1

W-2 forms can be purchased at the large office supply stores and hand-written or printed in your home printer.

Quick Employer Forms can be used to prepare W-2’s.

This TurboTax Help explains the TurboTax software that can prepare W-2's.

You may want to create an Electronic Federal Tax Payment System (EFTPS) account to pay Federal withholding, Social Security and Medicare taxes.

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H

Howard1948Answer

Employee

Paying yourself wages as an employee of the S corporation results in Federal income tax, Medicare and Social Security being withheld from your pay and remitted at least quarterly to the Treasury. It also means the employer S corporation pays matching amounts of Medicare and Social Security as a business expense to the Treasury. It also may mean other applicable taxes such as unemployment benefit taxes, SUI, FUI and who knows how many other Federal and state taxes there are on employee wages.

On the other hand, a distribution of income of the S corporation to a shareholder is a tax-free payment. Since the shareholder picks up his/her share of the income of the corporation whether it is distributed or not, a distribution itself is not a taxable event. And no payroll taxes are withheld. And the distribution is not subject to the Self-Employment Tax.

Now, don't get the idea that you can forego any wages in favor of all distributions. The IRS figured that out also and volumes of material have been written on how they might re-characterize a distribution as wages to collect the payroll taxes. Your best bet is to make a stab and the division yourself so you show that you recognize that a wage payment to a controlling shareholder is part of the game. As long as you're reasonable in the split (and don't get me started on what reasonable means) the IRS will most likely leave you alone. But if you say everything is a distribution and there are no wages, be prepared to fight a losing battle if and when they come knocking.

Incidentally, after year end, you cannot go back and re-characterize a distribution as wages since you did not report those wages on a quarterly payroll return nor did you give yourself a W-2. So you may be "up the creek" for 2015 but forewarned for 2016.

C

CPY1

If the S-Corp owner just runs payroll and pays taxes, but doesn't actually take the salary amount from the the Corporation,

#1) What is the P&L impact? If they take the money, it will be salary expense hence cut taxes.

If they don't take the money out (I think they are hurting themselves) by inflating profits artificially and paying more taxes later.

What is the Balance Sheet Impact?

Is it a) sits in salaries payable b) move to owner's contribution c) If they are also taking draws, will you net against it.

thanks

Critter

Employee

If you do not move the funds out of the corporate account then it has no effect on the P&L ... on the books it will be an expense of wages and a balancing entry as a loan from shareholder. With an S-corp the earnings are taxed in the year earned and not the year the profits are distributed. I highly recommend you seek professional assistance in getting your books set up correctly and/or getting educated in the way of keeping the books.

Carl11_2

Employee

.tell me the difference between "salary" and "distributions"? as it relates to an S-Corp

Salary is "earned income". You earn it by doing out and physically "doing something" on a recurring basis to "earn" it. Salary is reported to the person who earned it (the employee) on a W-2. Salary is required to have taxes withheld from it, and the employer (the S-Corp) must pay a "match" on the social security and medicare tax withheld from the employee's W-2 pay. There are other taxes on that salary the employer may be required to pay also - such as the UC Tax (Unemployment Compensation Tax) as but one example.

Distributions are paid to the owner of the S-Corp. The IRS requires all S-Corp owner's to take an RMD (Required Minimum Distribution) which is taxed - but the RMD is not subject to the additional self-employment tax paid by the employer on W-2 income. The owner pays all taxes on the RMD. The RMD is reported on the K-1 which the S-Corp is required to issue to all owners. What specific box or boxes on the K-1 that income is reported in, depends on the type of income being distributed to the owner(s). The three basic types of income to be distributed could be ordinary income, rental income, and investment income. Overall there are about 12 boxes for all the different types of income that could be distributed to owner's of an S-Corp.

M

Myrrhia

I'm a 100% owner of an s-corp. When I pay myself, I transfer money from my corporate account to my personal account and it's characterized in QB as "employee salary" -- okay. However, when I make estimated tax payments to the IRS and to the FTB (California), my understanding is that that is also my compensation, being withheld by the s-corp. What should I characterize those payments as? Now that I am doing my business takes using TurboTax for business, it is not catching those estimated tax payments as my "employee salary" and the numbers don't add up.

T

ThomasM125

@Myrrhia

The payments you are making would be considered shareholder distributions, as I am assuming you did not report them on a 941 or 944 payroll tax return.

To be considered a salary payment from your S corporation to you, you need to report the payment on a W-2 form and file form 941's quarterly to pay in the taxes associated with your salary. You are treated the same as an employee that would work for the company.

The distributions you have been making to yourself are not deductible by the corporation if you did not treat them properly as wages. What will happen if you do nothing further, is you will pick up the income of the S corporation as pass-through income as opposed to wage income on your personal tax return.

If you want to correct the situation for 2021, you would have to report the wages on a W-2 form and file the associated form 941's or 944.

In either case, you will get credit for the taxes you have paid in on your personal tax return, as estimated taxes paid in.

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F

forsythdan1

Not sure the actual question was answered. I have the same issue. I don't need to know about salaries, I'm only interested in discussing the money (profits) taken out of the company by me after salaries. I am the only shareholder. I believe he was asking the same thing about Turbo Taxes program.

No one answered this guys Actual Question. I have the same question.

In turbo tax for S Corp under the business section it asks if you have taken any money or property out of the corporation during the tax year other than salaries or loans?

then under The Federal Taxes Section it Turbo tax asks you to enter the total dividend distributions made to shareholders during the tax year 2022 from your accumulated earnings.

Are these the same thing. It won't let me do both so I'm unclear where to put the money taken from profits.

Rick19744

Employee

To address your specific questions:

Your first question is asking about normal distributions. This addresses most S corporations.
Your second question is asking if you distributed out dividend distributions. This would only be the case if the S corporation was a prior C corporation that converted to S corporation status and had accumulated earnings and profits. It would also apply if the S corporation acquired a C corporation that had earnings and profits. This is not a normal situation that would occur with 95%+ of TT users.
To address the third question, they are not the same thing as explained above.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.