Posted by John K Haslach, CPA, MST on July 21, 2004 at 04:21:25:
Income that passes through to you from an S Corporation on Schedule K-1 is not subject to SE tax. The IRS can come in and deem some or all of it to be salary and thereby subject it to Social Security Taxes.
Distributions in an S-Corp - Posted by JP(SC)
Posted by JP(SC) on July 20, 2004 at 09:15:44:
This is a continuation of a discussion below. I welcome any comments from an attorney who might like to chime in.
It was stated definitively by DaveT that any income in an S-Corp is automatically distributed, by virtue of the entitey being an S-Corp. My further studying does not support this. While all income in the S-Corp must be reported and taxed at the individual level, that does not necessarily mean that you have distributed it.
Refer to this site, for example:
http://nevadaincorporation.org/nevada-corporations/nevada-tax-implications-sc.htm
The author state “Corporate income is passed through to the shareholders who are required to pay the tax on that income whether or not it is distributed to them.”
This would lead me to believe that distribution of any kind, wheather salary or dividend, is the option of the corporation. And while it must all be taxed at the individual rate, there would be no self-employment tax due if no salary was actually paid.
I do not mind being proven wrong here. I only seek the facts of the matter. Where is my logic flawed?
Thanks.
JP(SC)
Re: Distributions in an S-Corp - Posted by John Merchant
Posted by John Merchant on July 20, 2004 at 13:38:55:
S Corp income is automatically passed through to share holders, legally and insofar as IRS is concerned, and it’s then immediately taxable by IRS.
But of course, if the S Corp has a bank acct. or has gathered other assets, and the S Corp mgmt or the person on the acct. doesn’t distribute, of course there is NO actual distribution.
IRS doesn’t really care if the shareholder got their distributions or not, because shareholder is liable just as though they had!
In today’s lingo, it’s the difference between real & virtual distribution & the law says that virtual is taxable.
Re: Distributions in an S-Corp - Posted by JP(SC)
Posted by JP(SC) on July 20, 2004 at 14:08:34:
Thank you for your comment Mr Merchant.
Perhaps my question was not clear, or perhaps I am a mental midget and just can’t get my mind around this idea. I have no confusion on the issue of income tax. I know it is due, regardless of distribution, real or otherwise. My question is with regard to self-employment taxes (Social Security, etc).
I think that what I am hearing from you is that regardless of actual distribution, the IRS will treat it as if it is distributed and expect both income tax and self employment taxes on any gains. That doesn’t seem fair, but then again that’s not their goal.
Do I understand you correctly?