Corporate Distribution - Subchapter S

[AnotherSurfer]

What is the name of your state? Florida

I have a some questions regarding my Corporate Taxes.

I have a Subchapter S Corporation.

A. I've been told by my Tax Preparer that Corporate Distributions aren't allowed for Subchapter S Corporations. I've made Corporate Distributions in an effort to save paying FICA Taxes on these earnings. I pay myself a salary and when I made additional monies I'd pay myself a "Corporate Distribution". I think the most I payed myself (in distributions) represented 27% of my salary for the year.

1. Are Corporate Distributions allowable (thus avoiding FICA Taxes) for Subchapter S Corporations?

2. If not, as my preparer has told me, how do I fix what I've done? It's suggested the money be shown as a loan and that I should pay it back over time.


B. I've always made my own (not utilizing an accountant or accounting service) monthly 941 Tax payments. Apparently, according to my Tax Preparer, I've done something wrong. Not knowing what Tax bracket I'd be in at the end of the year I would pay "Additional Withholding" for my personal taxes via my monthly 941 deposit, as follows:

Monthly $3,000.00
Gross Pay $3,000.00

Deductions (Employee)

Federal Income Tax (FIT) ($ 600/month) $600.00
FICA (Social Security Tax 6.2%) $186.00
FICA (Medicare Tax 1.45%) $43.50
Total Deductions $829.50



Gross Pay $3,000.00
Total Deductions $829.50
Net Pay $2,170.50

Payment Period - 1 December 2006 - 31 December 2006

Employee Withholding $829.50
Employee Withholding (Additional) $2,000.00
Employer Withholding $229.50

Net 941 Pay Amount $3,059.00

1. Is this wrong?

2. if it is wrong, what is the best way to fix what I've done?


Thank you very much for any advice.What is the name of your state?

[CraigFL]

I'm not sure what your preparer is talking about. Essentially, the reason you set up an S Corp is to have the profits flow back directly to the owners. Each year that you have made profits, the owners should have paid taxes on any profits that were not paid as wages. This should be sitting in you AAA(Accumulated Adjustments Account) on Schedule M-2. As you distribute thes profits(tax is already paid), you reduce your AAA. As long as your part of the AAA doesn't go negative, you should be OK.

Of course, the problem with taking these distributions and not paying tax and reporting income is that your verified income reported to Social Security is not as high as it could be. Your prior years earnings can become important in some situations.

[tranquility]

There be tall grass here right quick, so no one will be able to answer your question as there are many issues. Sure, there can be a distribution. (Per many rules including CraigFL's.) Now what? You have to pay yourself a salary. You must get reasonable compensation for your position. There are rules to this as well. Many rules to make that simple rule almost meaningless. Now, we have to ask what the character of the income is. Are you the president of an S-corp which has many employees and is renting out widgets? Or, are you doing sales work and using an S-corp solely for asset protection? You see, this is the type of question which requires a substantial amount of facts to answer. It's not that hard a question for someone who does this type of work, once they have all those facts in front of them and the abilty to interact with the principal, but over the internet? I wouldn't even hazard a guess.

Final answer, if you don't trust the competence of your accountant, find another. If you doubt his particular answer, ask him to explain it. (And, prepare to compensate him for his time to answer.) My gut is to go with what he is saying. My suggestion is to ask him why he is saying that.