S Distribution - How often ?

[NSNM]

How many times a sole shareholder employee in a S-Corp can take distribution in a year ?

A taxpayer is generating more money than in the past, and it is due to a lucrative contract he signed for his S-Corp in late 2007. He is drawing salary of $50000 per quarter from his S-Corp. In addition, he wants to take $50000 per quarter cash distribution for a total of $200000 for the year 2008. His reasoning is he needs cash to pay quarterly estimated tax to IRS and state.

His past 5 years' earnings were 120000 (2003 W-2), 120000 (2004 W-2), 335000 (2005 Schd-C), 210000 (2006 Schd-C) and 325000 (Schd-C and W-2 from his S-Corp).

He claims if he hires an employee, he would not pay more than $200000 for the job he is doing.

Would IRS reclassify quarterly distribution as disguised wages/salary and subject him to payroll taxes ?

Does the timing of distribution matters, if he takes it during the year or after the year ?

Would IRS consider $200000 an excessive distribution relative to his wages ?

This is critical, if new congress increase the social security tax limit on high earners as has been suggested in political discussions.

Appreciate and thank readers' views and opinions on the subject

[BHoffman]

In my experience, the IRS doesn't watch the distributions. It's the "reasonable salary" they have their eye on. I imagine any salary over the Soc. Sec. cap would not be that interesting to them.

If your client is the sole shareholder and takes reasonable compensation, I believe he can take whatever distributions his company's cash flow allows whenever he likes.

You are probably already aware of the capital gains on distributions in excess of basis.

Who know what might happen in the future for sole shareholders with no employees? There is some curiousity as to whether Congress will decide these types should be subject to SE tax on all of the profits, similar to Sch C filers. But for now, other discussions I've been watching regarding SCorp audits have not shown that the IRS will automatically recharacterize distributions to salary as long as the compensation is considered "reasonable". Documentation of what is actually reasonable might include a visit to www.salary.com or some other research.