I'm wondering how most of you handle S-Corporation cash distributions to a sole-shareholder. Is a payroll check prepared for each withdrawal and payroll taxes deposited? Or, do you record the distributions as officer loans until a threshold ($10,000 or so) is reached, then prepare a payroll journal entry? Or, what method do you use and when do you deposit the payroll taxes? I'm looking for the real-world practice. Thanks for you help.
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First let me say what everyone knows. The current year profit and tax attributes of the S-corp are taxable to the shareholders on their current year 1040 regardless if the money is taken out that year or later years.
There are a limited number of ways a S-corp shareholder can take money out of the corporation. Here are a few of the ways off the top of my head.
1) Salary with payroll taxes withheld. The gross pay is an expense to the corporation reducing taxable profit and taxable to the shareholder. An active in the business shareholder is required to take a reasonable salary deducted on 1120S, page 1, line 7.
2) Tax-free distributions coming from profit that has already been or will be taxed on the 1040 tax return. No reduction of profit for the S-corp and not taxable to the shareholder. Such distributions are called "property distributions" as cash is a property and the amount is reported on page 3 of the 1120S on line 16d.
3) Tax-free reimbursements for business expenses accounted for with proper documentation to the S-corp (so called accountable plan). An S-corp expense reducing profit and not taxable to the shareholder.
4) Rent of property owned by the shareholder and leased to the S-corp at fair rental value. An expense reducing profit for the S-corp but taxable income to the shareholder.
5) As a vendor providing a service or materials in a separate owned business that is not related to the fact that the vendor is a shareholder. ie: shareholder is a CPA and provides CPA services as a vendor.
6) Taxable Dividends from earnings when the S-corp was first a C-corp. If the S-corp was never a C-corp with earnings this would not be possible. Not an expense reducing profit for the corporation, but taxable income to the shareholder on 1040 Sch-B.
Someone else here may add other ways.Last edited by OldJack; 02-07-2007, 07:52 PM. -
Timing
Old Jack -Thanks for your thoughtful response. However, perhaps my question wasn't clear. I'm interested in learning how others handle handle the timing for payroll tax purposes of cash withdrawals to the sole S-Corporation shareholder assuming the withdrawals are/will be treated as salary? Of course, the correct answer is to issue a payroll check for each withdrawal and make the payroll tax deposits as necessary. But, I believe a common practice is to record the withdrawals as a shareholder loan until either the end of the year, or when the interest-threshold of $10,000 is reached. At that point, many accountants simply prepare a payroll journal entry and make the required deposits. My question is...what is the practice of those here on the BBS? I understand a reasonable salary must be paid.Comment
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The scenario you describe would run afoul of our state's wage and hour laws and all of our S-Corps. have regular pay periods with paydays."A man that holds a cat by the tail learns something he can learn no other way." - Mark TwainComment
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Well if you are able to keep up with their bookkeeping monthly then a payroll check should be issued every month and then the payroll taxes deposited when due. I've got one customer that comes every quarter and I look at what they have paid themselves. I put most towards payroll until the middle of the year when I can see how they have done in the business. I then start dividing out between payroll and distributions.Comment
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What interest threshold are you referencing?
You could just write a payroll check at the end of the year and pay the taxes on the Q1 941. You would need to file 941's for the other 3 quarters though, with $0 in wages.Originally posted by Zee View PostComment
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It's always been my understanding (right or wrong) that loans to a sole S-Corporation shareholder did not require an interest component until they aggregate amount exceeded $10,000 under the Diminimus exception to IRC Section 7872(c)3.Originally posted by JoshinNC View Post
As such, accountants often simply prepare a payroll entry as the $10,000 amount is approached filing the payroll tax reports and paying the payroll taxes using the date of the payroll entry or dummy check as the payroll date.
In essence, the loan is actually being repaid by reclassifying the loan as a wage.Comment
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Huh?
I have never looked at this as an opportunity for planning. I will review it though. Sounds interesting.Comment
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Monthly payroll
When I set up a new s corp, I explain payroll and reasonable compensation to the person. I explain to them that the IRS is looking at this situation and therefore they should be sure to pay themselves at least once a month a reasonable compensation for the work they are doing.
They decide on an amount and I show them how much to write the payroll check for and how much will be withheld for payroll taxes and how much the company will match.
Since I only have a few of these companies, I set them up on EFTPS. If they set up the payroll so that the amount is always the same, I will make their EFTPS transfer for them. They appreciate the extra service I give in doing this for them and it insures that the payroll deposits are made on time.
Then if they need more money during the month, they can take a distribution separate from the payroll.
This has worked for me and the people I am working with. Hope this helps you.,
Linda FComment
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One thing to think about
If you have access to their EFTPS account, and should they ever (God forbid) run intoOriginally posted by Linda F View Post
trouble, fed taxes not paid, RO on their backs, and trust fund penalties' ugly head
rises, you might be in a fix.ChEAr$,
Harlan Lunsford, EA n LAComment
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