How to pay shareholder employment income

What is the name of your state? NC

Partners and I are researching both s corp and LLC information before deciding on entity. We will have 6 employees (3 shareholders, 2 hourly and 1 as a 1099 contract trainer). In addition to money for time worked, each shareholder will draw a monthly bonus if we meet quota. We also intend on giving a small dividend in April of each year to offset any extra taxes each shareholder will incur in their K1.

How do we pay the shareholders money for time worked plus bonus money (when applicable) so that it's not double taxed?

Thanks for your replies.

Patsy

PatsyD said:

What is the name of your state? NC

Partners and I are researching both s corp and LLC information before deciding on entity. We will have 6 employees (3 shareholders, 2 hourly and 1 as a 1099 contract trainer). In addition to money for time worked, each shareholder will draw a monthly bonus if we meet quota. We also intend on giving a small dividend in April of each year to offset any extra taxes each shareholder will incur in their K1.

How do we pay the shareholders money for time worked plus bonus money (when applicable) so that it's not double taxed?

Thanks for your replies.

Patsy

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The best way to handle it is to treat them no differently than any other employee. Issue proper paychecks with proper withholding, and a W2 at the end of the year. However, with either an S-corp or an LLC (an LLC can elect to be treated as a partnership, C-corporation or S-corporation for tax purposes) there would not be any double taxation anyway, because all of the profits would flow through to the shareholders, unless you elected to treat the LLC as a C-corp, which would NOT be a good idea.

Also, the money that you intend to distribute in April would not be a dividend, it would be a distribution. That's an important distinction. Dividends apply to C-corporations only.

However, its critical that a form 2553 be sent in to the IRS as soon as you form the organization, to make the S-corp election.

Thanks so much for the reply -- I was thinking on those lines but, wanted to get another opinion. The hourly pay plus any bonus will be treated as regular income with taxes paid (will use QuickBooks as I like their payroll section). Then will give a "distribution" annually to offset any profit the company has to pass on to shareholders.

Again... thanks!

Patsy

P.S. The information on the form 2553 was included in our s corporation papers from NC -- in big bold print..... Guess they, like you, wanted to be sure we understood!