K1 pass through income that is not salary nor distribution LLC S-corp

Forum|Forum|3 years ago
February 7, 2023
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I only paid myself $5000 in 2022 in salary from my new business and took no distribution.

The K1 shows $14,000 business income (box 1) and $5000 W2 salary

Since my income for the year is so low I still don't own any taxes.

Does IRS consider the $14,000 a distribution or is that a third kind of income?

I don't want to take distribution because I'm not ready to pay myself a reasonable salary out of the business.

So is it ok to leave the return like this?

TurboTax Business Windows

Best answer by Anonymous_

@SCORP2 wrote:
Does IRS consider the $14,000 a distribution or is that a third kind of income?

If you have $14,000 in Box 1 of your K-1 (1120-s), then you have $14,000 of ordinary income to report just for that K-1 income item (the $14,000 in Box 1 is not a distribution - distributions from S corporations are reported on Line 16 (D code) of your K-1 (1120-S).

It makes no difference whether or not you took a separate distribution; the $14,000 is taxable income.

Anonymous_Answer

Employee

@SCORP2 wrote:
Does IRS consider the $14,000 a distribution or is that a third kind of income?

It makes no difference whether or not you took a separate distribution; the $14,000 is taxable income.

SCORP2Author

I'm not understanding this concept.

Can IRS come and say that I didn't pay self-employment on that ordinary income and that it should have been salary?

Or is it not a problem because I didn't actually withdraw the $14,000? But then what happens if I withdraw that $14,000 as salary this year, do I pay income tax on it again?

Anonymous_

Employee

You report $14,000 of ordinary income and $5,000 of W-2 income on your current year return. The amount that you distribute to yourself is not relevant; you are still taxed on both amounts.

The IRS can always recharacterize some or all of the $14,000 if they do not believe the $5,000 is a "reasonable salary" for the services you perform for the corporation.