S-Corp Owner - Questions about salary and Estimated Payments

[ETax847]

Prospect who is an S-Corp owner came in to ask some questions.  He has W2 income from his company of 100k and distributions of $150k.  Does he need to make estimated payments if the distribution does not come to him until the end of the year? 

[JohnH]

I see this is your first post.  Are you familiar with the issues surrounding "Reasonable Compensation" and S-corp owners?  Did you explain this to the prospective client?  This is the first conversation I always undertake, because if they won't deal with that, then we really don't have anything else to discuss.  

[Jack from Ohio]

The salary vs distribution does not look "reasonable" by my way of thinking. The IRS is really tracking this situation lately.

John H is correct.

[ETax847]

This was just a quick call. I'm following up with him on Monday and agree that the salary does not look reasonable.  As for the estimated payment issue on the distribution, I am thinking he needs to make quarterly payments, but have not found anything in print to substantiate it.  Thanks guys!

[JohnH]

He can obviate the estimated tax problem by taking a salary/bonus check in December and allocating most of it to withholding taxes.  (for example, $10K salary, less $765 SocSec/Med, less $8K Federal Withholding for a net check of $1,235.  Adjust as necessary for state tax, etc.)  The withholding paid via W-2 is considered as being paid in equal amounts throughout the year. 

[Jack from Ohio]

Are we talking 2013 or 2014?

[SFA]

The "distribution" is not the same as the K-1 income that he will report on his return, which will be assumed to be earned evenly throughout the year. As for any "wage/bonus" it may be fair to wait until the end of the year (from a management point of view) to see the full year's performance before issuing an employee bonus. Wage income is also assumed to be earned equally throughout the year, unless the penalty form is completed and income is scheduled out throughout the year.

 

How many employees does the company have? The more employees that help to earn the bottom line profit, the more likely that his compensation may be correct for the work that HE is performing. It is perfectly acceptable to earn a profit on each employee and that profit can go to the bottom line without affecting the salary of the shareholder.

[kcjenkins]

John and SFA both make great points.  We really don't know enough to evaluate whether that yr-end distribution is 'reasonable', i.e. defendable.  But either way, taking a final paycheck at year-end with w/h is always an easy way to avoid overpaying during the year, yet avoiding the estimated tax issues. 

[michaelmars]

Can't determine if salary is reasonable or not, the reasonableness is based on what you would pay someone to do the job of the officer.  if there are 10 other employees then the distribution amount could be the profit of the employees and totally acceptable.  if the shareholder is the sole employee then its not reasonable.   Etc.

 

in any case with the above scenario I would have the payroll raised to max out fica.