S Corporation Salary

[Minvest]

Client's S Corporation Gross receipts are $381,000.

He pays himself a salary of $215,000

He has misc. expenses of $20,410

His business income is therefore $145,814 (381,100-215,000-20,410)

I will report the $145,814 on Schedule K-1 (Form 1120-S).

I show him owing Federal taxes of $25,091

Does he have to report the $215,000 salary any other place and pay any other taxes?

Thanks for your responses!

[ljr]

He should have a w2 for the salary and a K1 for the net profit. The total of the 2 amounts are taxable on his 1040. You show him owing the $25K on his personal tax return? Did you take into consideration any taxes withheld on his payroll? You don't say where he lives but me might owe state and local income taxes 

[Minvest]

My client lives in Florida...no sales taxes

He created an S Corp in November 2021...only income is from his business in 2022...he did not work for an employer, so no W-2

No taxes were withheld in 2022

I'm preparing Estimated tax vouchers for him.

My concern is what taxes are due on the $215K salary were are claiming as an expense on his 1120-S tax return.

Thanks for your response.

[ljr]

He needs to have a W2 from his own s-corp - he is both an owner and an employee. How can you say he paid himself a salary of $215K without a w-2? it sounds like he took distributions not salary. If there is no w-2 then he DID NOT take a salary. Where is the withholding for social security and medicare as well? 

[Terry53029 · Accepted solution]

S corps have to issue w2 to officers that do services for the S corp. see fs-2008-25. http://www.rcreports.biz/pro/docs/irs.fs.2008.25.pdf

[Terry53029]

S corporations that pay federal income tax on Line 22c of federal Form 1120S. Tax-exempt organizations that have “unrelated trade or business taxable income” for federal income tax purposes are subject to Florida corporate income tax and must file either Florida Form F-1120 or F-1120A.

[qbteachmt]

You used the word "Salary" which would be correct for Payroll. But you apparently don't have Payroll. Yet, S Corp is required to pay out through Payroll at Reasonable Compensation for services provided by any person, even if your person is the sole Shareholder, doing the work of the business.

Your client's $215,000 Salary would be reduced for takehome purposes by the employee taxes and the business incurs employer share of payroll taxes.

There still is time to get this right, before year end. If you are not familiar, then find someone to help you both with "year end payroll and reasonable compensation."

I use the resources at RCReports (Reasonable Compensation Reports) an they sent an end of year reminder:

"If you work with S Corps, you should be looking at all of your S Corp owners' compensation and taking steps to reconcile reasonable compensation if necessary. If this isn't done before year-end, your client (and you) could run into compliance issues come tax season.

Steps to reconcile reasonable compensation:

1. Run a reasonable compensation report for your client.

2. Compare the report to the salary that your client paid themself via W-2 in 2022.

3. Make adjustments now, before year-end, if necessary.

For more information, read this guide, or schedule a 1:1 demo of RCReports where I'll show you how you can run a reasonable compensation report in just a few minutes."

[qbteachmt]

Oh, two more points: It seems you might have trouble with 2021, as well. And, a Sole Proprietorship draw or any S Corp distribution (which cannot be taken in lieu of payroll) are not either of them part of Expenses, anyway. So you and that client have it wrong, when it is not payroll, and it should be payroll.

[JBenciv]

You still have 11 days to get it right.  You need to get a payroll processer and give him a paycheck pronto, for whatever would be considered reasonable compensation for his services, and get said pay on a 2022 W-2 form.  Otherwise, you are risking a visit from the tax man and a reclass of distributions to salary and the accompanying payroll taxes, interest and penalties that come with it.